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Many credit unions today carry equities on their balance sheets – and for good reasons. Whether it’s helping offset the rising costs of employee benefits, supporting community giving through charitable donation accounts (CDAs) or funding executive benefit plans, equities have proven to be a winning asset class over the long-term and can play a meaningful role in §701.19(c) investment strategies.
In most cases, credit unions wisely engage outside advisors to manage those investments. But even with professional management, institutional leadership remains responsible for setting the investment philosophy, evaluating strategies and staying the course, especially in volatile markets, where uncertainty can cloud even the most well-intentioned plans.
Emotional Bias: A Hidden Threat to Performance
Emotional and cognitive biases don’t disappear just because there’s an advisor involved. Investment committees, boards and senior leaders are still susceptible to behavioral pitfalls, especially when markets are under stress or headlines are swirling.
Behavioral finance highlights several key biases that can influence institutional decision-making:
- Loss Aversion: The fear of losing capital can lead to calls for reducing risk or shifting allocations – sometimes at the expense of long-term goals.
- Recency Bias: A recent rally or sell-off may prompt second-guessing, even when an advisor is following a well-defined strategy.
- Herd Mentality: Observing what peers are doing or reacting to industry chatter can lead to reactive decisions, even if those actions aren't aligned with objectives.
These tendencies can lead to unnecessary allocation changes, disruption of long-term strategies, and in some cases, abandoning investment strategies. The result? Inconsistent performance, missed opportunities and reduced confidence in the process – both internally and externally.
Rules-Based Investing: A More Disciplined Path Forward
The antidote to emotional decision-making isn’t instinct, it’s structure. One of the most effective ways to bring structure to an equity strategy is through rules-based, systematic investing.
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Credit unions would benefit by turning to factor investing, a strategy rooted in decades of research. Factor investing focuses on capturing specific, well-documented drivers of return such as value, quality, momentum, size and low volatility. These factors are implemented consistently through pre-established rules that help remove emotion from portfolio construction.
For credit unions, this systematic approach offers important advantages:
- Objectivity: Strategy decisions are guided by data and long-term logic, not market noise or short-term emotions.
- Transparency: Leaders and boards gain clarity into why assets are held and what’s driving performance, making oversight and communication easier.
- Consistency: A rules-based framework supports alignment with your investment policy, even in volatile environments.
- Risk Awareness: Factor-based models can be designed with specific risk tolerances in mind, helping to preserve capital while seeking returns appropriate for the institution’s goals.
Employing systematic approaches can help credit unions stay on track even when emotions run high.
From Oversight to Strategic Alignment
The most successful credit unions treat investment oversight as a strategic function, not just a compliance exercise.
Leaders play a critical role in setting clear investment objectives, ensuring alignment with the credit union’s mission and selecting advisors who implement disciplined, evidence-based strategies. That alignment is especially important during periods of uncertainty, when emotional pressures run high and the temptation to react can be strong.
A rules-based approach helps protect against those impulses. It brings structure to the advisor-client relationship and reinforces the institution’s long-term focus. By committing to a strategy that is grounded in data, not drama, credit unions can lead with clarity even when the market isn’t cooperating.
Purpose-Driven Investing, Built to Endure
Credit unions invest to serve their members and communities, not to chase returns. That’s why your investment strategy deserves the same level of purpose and discipline you bring to every other aspect of your institution.
By recognizing how emotional bias can undermine results, and by partnering with an advisor who implements systematic, rules-based strategies, credit union leaders can build investment programs that are resilient, transparent and mission-aligned.
In today’s market, noise is constant. But with a clear process, a steady hand and a strategy designed to remove emotion from the equation, your credit union can stay focused on what matters most: Delivering long-term value to the people and communities you serve.
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