The Mentor Journal
Portfolio Management
What to Do When You’re Not Investing
Roadblock sign warning of no investing ahead
By Chris Nelson
July 3, 2023
Reading Time: 6 minutes

If you’re like most community bankers, I imagine that you’re not doing much investing right now.  After spending the past few years putting excess funds to work in the investment portfolio, the pendulum has swung the other way. 

Cash has now dried up for some bankers, so investing is a lower priority.  Others are still shellshocked and hesitant to consider investments after the wild ride of the last year.  And there are always other things to do in the day job at the community bank or credit union to keep us occupied, right?

But just because you may not be investing doesn’t mean you can ignore the investment portfolio.  In fact, quiet times on the investment front are the perfect time for other important investment activities.  These tasks might not have the urgency of needing to put funds to work in the investment portfolio, but they’re important nonetheless.

“Just because you may not be investing doesn’t mean you can ignore the investment portfolio.”

Table of Contents

5 Things You Can Do When You’re Not Investing

Here are five tips on things you can do for the investment portfolio when you’re not investing.  Some of these suggestions may be quick or periodic to-dos, while others are tasks that might take some time but can be squeezed in around other parts of the day job.

Tip #1 – Regularly Monitor Existing Investments

This first tip may sound pretty straightforward.  But I’m not just talking about how much your unrealized loss position or portfolio duration has changed.  Don’t get me wrong, those are important.  But there are other things to review and keep an eye on. 

It may be worthwhile to periodically check the underlying option risk (or “optionality”) of the positions in the portfolio.  It can be helpful to know how changes in interest rates will affect your investments’ behavior.

Callable Bonds

For example, have any callable bond situations changed?  If you have callable securities that are out-of-the-money and not callable right now, do you know how much interest rates would have to shift for them to become callable again? 

Many bonds will likely remain uncallable even with major shifts in the yield curve.  However, I’ve seen examples recently as I’ve reviewed investment portfolios where a change of 100-150 basis points was enough to bring the call option back into play. 

Residential Mortgage-Backed Securities

Another place where it’s worth digging a little into the optionality exposure is with residential mortgage securities.  While they don’t have calls like bonds do, they have embedded optionality that creates the prepayment and extension risk that we’ve grown too familiar with in the past few years. 

Monitoring how monthly prepayment speeds change for the pools you hold can be really helpful.  Even in the higher rate environment, you can still see differences in prepayment speeds for reasons tied to credit-related events or because of the underlying loan collateral characteristics.  If you have an MBS that behaves differently than the other holdings, it may be worth a little digging to understand why it’s happening.

Monitoring callable bond and mortgage security holdings like this might sound like a heavy lift, but it’s very doable with some help.  Your broker or someone with access to Bloomberg should be able to help pull the data together.  Once you’ve established what you’re looking for, it’s just a matter of updating the information as needed.

Credit Quality

Something else worth monitoring is any changes in the credit quality of your non-government agency-backed investments.  Whether you hold municipal or corporate bonds, private label mortgage securities or CMOs, collateralized loan obligations, or bank sub-debt, it’s worth giving them a check-up.  You’re likely doing some of this already as part of your required post-purchase due diligence, but these days it’s worth taking the time to check, especially when it’s quiet on the investment activity front.

“Quiet times on the investment front are the perfect time for other important investment activities.”

Tip #2 – Explore New and Different Security Types

Most community financial institutions are regular investors in Treasury and agency bonds, mortgage-backed securities, and municipal issues.  But other types of fixed-income investments could offer opportunities for your institution’s investment portfolio without stretching way out of your comfort zone. 

The problem is that we rarely have the time when we’re busy investing to learn about them and how they work.  When you are less active on the investment front, take the time to learn about investment types like commercial mortgage-backed securities, CMOs, SBA securities, and variable-rate investments.  Increasing your awareness of their characteristics, benefits, and risks will provide you with additional tools in the portfolio management toolbox.

Tip #3 – Review Your Institution’s Investment Policy

The investment policy is one of the main guides to how a community banker manages the investment portfolio for their community financial institution.  But how well do you know what the policy contains? 

This is a good time to review the policy and determine how well it aligns with your institution’s portfolio objectives, risk tolerance, and regulatory requirements.  In addition, you’ll want to consider if anything in the policy language needs to be added, removed, changed, or clarified. 

The goal is to have an investment policy that is robust enough to make sure the investment process stays on track without being so cumbersome that managing the portfolio becomes challenging or impossible to do effectively.

Tip #4 – Review (or Develop) Your Investment Strategy

A great time to work on your investment strategy is when you’re not as active in managing the portfolio.  It gives you the time to think and plan without having to make investment decisions simultaneously.

An investment strategy that’s customized to your institution’s needs, risks, objectives, and comfort zone gives you a road map to help you navigate the markets, no matter what’s happening.  It also enables you to communicate more effectively with your brokers and share what’s happening in the investment portfolio (and why) with management, ALCO, the board, and regulators. 

Having a solid investment strategy in place is the most important tool you can have to be a successful portfolio manager.  It’s one of the reasons I began offering live training workshops for community bankers to help them create a customized investment strategy. 

(Click here to learn more about the Bond Investment Mentor Investment Strategy Workshops and when the next one is scheduled!)

Tip #5 – Stay Informed and Educated

Even if you’re not investing, staying on top of what’s happening is important.  Doing so allows you to jump on any occasional opportunities that might come along. 

When I was managing my bank’s portfolio, some of my best investment finds happened when I wasn’t actively investing but stayed in the loop.  It allowed me to pick up some interesting bonds that I would have missed if I wasn’t paying attention. 

That doesn’t mean you need to check things as frequently as you might when actively investing.  But speaking from experience, I’d caution you against totally ignoring the markets, either.  If you’ve cultivated good relationships with your brokers and they understand the kinds of investments that interest you, they may give you a heads up occasionally when an opportunity presents itself.

Being less active in investing also gives you time to build your knowledge base and professional skills.  There are a lot of good resources available, and you can pick what works best for you.  Whether it’s self-study courses, online webinars, podcasts, conferences, schools, or other professional training, devoting some of your time to boosting your investment skills and becoming a better portfolio manager is a smart move that helps you and your community financial institution.

Don’t Ignore Your Role as Portfolio Manager!

Hands holding chalkboard with list of five things to do when you're not investing

As I mentioned, these activities can be blended around the other “day job” things you need to do.  I’m not looking to load up your to-do list, that’s for sure! 

But it’s crucial to recognize that even during periods of limited investing, you don’t want to ignore the investment portfolio and your role as a portfolio manager.  Investing time in activities like the ones I mentioned above will pay off for you and your community financial institution in the long run.

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