I read with interest the article written by Dennis Hanzel in the Nov. 29 issue. I agree that it is troubling that the Recreation Centers of Sun City West lost substantial funds in their investment account. It is also troubling, if true, that the members of the Budget and Finance Committee did not discuss the issue at board meetings. Open and free discussions, even troubling issues, are an important ingredient of good management.
However, I strongly disagree with Mr. Hanzel when he states that if a bond ladder had been employed there would be no losses. Every investment including bonds have risks. In the 10 years leading up to the pandemic, bonds paid a very low interest rate of return. If our association purchased bonds during that period of time, they would have lost substantial value when the interest rates increased, as bond value and interest rates move in opposite directions. The longer the term of the bond, the larger the decrease in value as interest rates increase. That is called interest rate risk, and bonds most assuredly are subject to interest rate risk.
Restated simply, if the association purchased a large number of bonds, their value in the past two years would show a substantial loss of value due to inflation forcing the Federal Reserve to increase interest rates. Also, those losses were baked in by the association buying them in the past. While we should not blame the current board for those losses, they do have a responsibility to discuss the issue.
I find it interesting that Mr. Hanzel showed the FI12 to professional money managers and they all agreed the investment options are restricted to investments that do not risk capital. I would like to point out that every investment have risks to capital, and every investment manager should know that. As should Mr. Hanzel if he is opine on it.
If the association had capital expenses that were either not budgeted, or were budgeted but their replacement date had to be moved up by unexpected issues, then the association would have both a decrease in the value of their assets and actual losses because they would need to sell those assets and realize the loss.
Personally, I buy very few bonds or CDs for my family’s finances. In recent times bonds have paid so little in income, often below the inflation rate that you can’t help but lose by investing in them.