Associations have been managing storms on many fronts these last few weeks, and one of them has been deciding what to do about the losses they’ve incurred to their reserve portfolios. Depending on how much risk the association takes with its reserve policy, its portfolio could have seen declines of 10 percent, 20 percent, or more. And while stocks are expected to be down, many associations have seen their fixed-income investments (e.g., government and corporate bonds), which were intended to be safe and stable, decline as well.

So, each association must answer the questions: What do we do with our reserves now? Can we take advantage of this situation somehow? Should we move to cash? When will the market come back? Are bonds still safe?

First and foremost, it’s critical to know if and to what degree the association may need to tap reserves. The future cashflow situation may not become clear for a while, so this is a best-judgment exercise to understand likely and worst-case scenarios.

If you’re highly certain that you won’t need to withdraw from reserves, its likely best to remain disciplined to your investment policy. Ideally, your investment policy includes guidelines that bring discipline to the process, such as a target-asset allocation and an allowable range around the target. Once stocks have declined such that their percentage allocation falls below the allowable range, you would sell bonds and buy stocks to move the portfolio back to its target allocation. As a result, you would be selling from what’s doing comparatively well and buying into what is down. Buying lower and selling higher.

First and foremost, it’s critical to know if and to what degree the association may need to tap reserves. The future cashflow situation may not become clear for a while, so this is a best-judgment exercise to understand likely and worst-case scenarios.

If you think you need to make some smaller withdrawals from the portfolio, this would likely result in a natural rebalance of the portfolio. Selling from what is comparably up—fixed income—would likely move the portfolio closer in line with its target allocation.

If you’re uncertain about the need to tap reserves, but believe there is a relatively high likelihood that substantial withdrawals will be needed, it could make sense to sit tight and allow your investment to drift outside of the allowable rebalancing range. In such a case, the finance committee should be involved to approve operating outside the guidelines of your investment policy.

If significant withdrawals are likely, as tough as it may be, serious consideration should be given to selling stocks now, rather than risk further declines.

Many associations structure their reserves such that they maintain some excess operating cash, a short-term portfolio, and a long-term portfolio. It’s likely that your excess operating cash and all of your short-term funds have maintained their value and can be easily liquidated to meet current cash needs. It’s also likely that you have a significant amount of fixed income in your long-term portfolio. Given that stock values are down, another way to think about rebalancing is moving some of the fixed-income assets, which likely comprises a greater-than-target allocation of the long-term portfolio, into your short-term or operating cash accounts. This will simultaneously rebalance the long-term portfolio while making needed cash available for operations.

With respect to bonds, even high-quality bonds, which investors typically flock to in times of crisis, they may have experienced significant volatility during March as some investors moved to cash earlier in the month. The Federal Reserve System subsequently launched a new bond-buying program and has intervened in other areas to keep the plumbing of fixed-income markets working more smoothly. As a result, high-quality bonds rallied to gains over the month. The strongest performer in the bond market over the past few weeks has been government bonds. These have posted solidly positive returns while other bond market sectors, and especially lower credit quality bonds, are down.

Despite the recent volatility, we continue to remain confident that a high-quality, fixed-income allocation will provide valuable diversification benefits when combined with stock in an investment portfolio. It will remain much more stable than the equity allocation providing an area from the portfolio to draw from for cash flow needs or to rebalance the portfolio, selling from fixed income and buying back into stock.

Unfortunately, no one knows the future direction of the stock market, or if it has hit bottom. It’s likely to experience extreme volatility until more progress is made containing COVID-19 in the U.S. and abroad. As a result, it’s best to focus on what you can control—managing your investment reserves to best position your organization in the near term and the future.