• Communicating Your Investment Strategy

    PFITR
Write it down

Why put your plan in writing? Here are a couple of reasons why it’s important to do so:

The biggest risk the county took is called reinvestment risk, or having to reinvest the money at a lower interest rate when the current investments come due.

For example: Suzie Financial Officer and her trusty broker set up a barbell strategy — that means about half short-term investments and about half longer-term investments (refer to Chapter 1 for more about barbell strategies). The tea leaves were implying that interest rates would not keep rising, so to further protect against falling interest rates, the portfolio went 60 percent long and 40 percent short. Everything was fine until Bill, the new city manager, decided to add his two cents’ worth and asked why they had so many long-term investments. Suzie’s trusted broker had talked about the barbell strategy but couldn’t articulate it. Bill said too much long-term, sell it all, and invest in short-term. Two years later, the portfolio was earning $500,000 a year less because the organization exited the good coupon rates it had “locked in” by having a portion of the portfolio in longer-term investments. Unfortunately, for most Financial Officers in this situation, the new city manager was oblivious to the mistake of getting rid of all longer investments in a falling interest rate market.

In this example, a written strategy could have saved the city a pretty penny

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