How To Write an Investment Policy Statement - Passive Income MD
How to Write an Investor Policy Statement

How To Write an Investment Policy Statement

October 20, 2018 • 10 Min Read

This post may contain links from our sponsors. We provide you with accurate, reliable information. Learn more about how we make money and select our advertising partners.

Do you have an investor policy statement? If not, here's a great blueprint for you.

Today's Classic is republished from the White Coat Investor. You can see the original here.

I once shared my Investment Policy Statement on the Bogleheads forum. Apparently, most people had never seen such a thing. They thought it was so unusual it was stuck into the wiki. It wasn’t actually the entire statement, but it was the portion I was willing to share. You see, an IPS is a rather personal document as it not only dictates your financial plan, but also reveals your values, which are often very different from those of other people.

I went looking for my IPS for this post and noted it hasn’t been modified since July 29, 2007. That’s pretty beneficial, as it obviously got me through the 2008-2009 bear market, but also ensured I captured all the upside coming out and am well on track (actually far ahead of “the track”) to reach my goals. It’s probably time we revised it actually. At any rate, I’ll share a few pieces out of mine and talk about what you ought to consider including in yours. The most important thing, however, isn’t mine, it’s yours.

Section 1: Your Goals

Our investments will provide an income of $100,000/year (2006 dollars) while still growing at the inflation rate providing us financial independence by June 28, 2030.

Any investing plan ought to start with setting goals. Realize that these will likely change, and that’s perfectly okay. They might not change as much as you think, but most importantly, any plan is better than no plan. Goals should be specific, attainable, and valuable to you. Here are the goals from my 2007 statement (1 year out of residency):

  • We will be worth $1 million dollars by June 28, 2017.
  • Save at least 20% of our income every year beginning in 2007.
  • Save at least $30,000 (2006 dollars) per year while in the Air Force.
  • Save at least $53,000 (2006 dollars) per year after finishing with the Air Force.
  • We will always max out the tax-sheltered retirement vehicles available to us.

What’s good about those goals? They are both time and real (inflation-adjusted) dollar amount specific. They are attainable (so far, so good on all but the first one, but I’m over 15 years out on that one.) In fact, we’ve crushed most of these goals and informally set some new ones. They are also valuable to us.

I would suggest setting specific amounts you wish to have for college (and when), retirement, and any other meaningful financial goals such as paying off student loans, getting to a net worth of $0, saving up a certain amount for a down payment, or paying off a mortgage early.

Section 2: Investment Section

In this section, we listed how we planned to invest. Remember this 2007 edition wasn’t the first edition, and when this IPS was initially written, we had a five-figure net worth. So this really gives you a glimpse into our plan from the very beginning. At any rate, here’s what we put into it at the beginning.

  • This is a great place to put any reminders you may wish to have when you look back at this during a market correction to remind you of what your plan was and why. Probably would have been a great place to have included something about rebalancing. We will strive to minimize the effects of taxes and expenses on our investment returns.
  • Our primary investment vehicles will be stock mutual funds and bond mutual funds, preferably within tax-sheltered accounts.
  • We will also consider the use of individual property investment real estate to meet our goals if careful analysis indicates a reasonable opportunity for profit.
  • In general, we will favor passively managed investments over actively managed investments.
  • We will calculate our savings rate and our total return and real return each year.
  • We will strive to achieve a real return of at least 6% per year, averaged over our investment lifetime.
  • We will not panic and sell securities due to market corrections.

Section 3: Home Ownership

Anything related to your home goes in this section. Here’s what we put.

  • We will strive to own our home whenever possible.
  • We will not spend more than 20% of our income on mortgage payments and property taxes.
  • We will carefully research both our home purchases and our mortgage options to ensure we obtain the least expensive options available to us.
  • We will use home equity loans only to improve the home, consolidate other loans, or to invest in guaranteed investments such as money market accounts or government bonds.
  • The mortgage on the home we are living in will be paid off at the time of retirement.

Nothing too complicated there. You might also add a section about student loans if you have any. The only student loan I had in 2007 was fully subsidized and didn’t require payments. Plus it was only $5K, so we didn’t include it. But most young docs probably should.

Section 4: Spending and Giving

This section more than anything else will reveal what you value. But I think it is important to include this section because it helps you to remember WHY you’re saving and investing now- you’re saving now so you can spend MORE later. Here is part of ours:

  • We will track our spending at regular intervals to ensure appropriate use of our resources.
  • We will not use credit to purchase automobiles, appliances, or vacations.
  • We will use credit only for convenience, mortgages, and safe, fixed-income investments.

This is a great place to discuss charities you wish to support during life or even after your death. You can talk about any inheritances you wish to leave as well. Want to drive a luxury car? It goes here. Want to see a new country every year? It goes here also.

Section 5: Emergency Fund

An emergency fund is such a key part of a financial plan that it deserves its own section. We’ve since expanded ours to 6 months and keep it in a high-yield online savings account. Probably ought to update this thing.

  • We will maintain an emergency fund equal to at least 3 months of expenses, but 6 months when combined with directed savings (auto, home etc) (minus taxes and designated savings) in guaranteed investments such as money market funds, short-term bonds, or CDs. We will count this as part of our fixed allocation.

Section 6: Asset Allocation

This is an important section to include, as this dictates what you will be investing in on a month to month basis. Here’s how ours read in 2007:

  • Our overall asset allocation will be 75% equity investments and 25% fixed income investments. Investment real estate and our home will not be calculated into this figure. Our emergency fund will be calculated as part of the fixed income. The ratio will decrease gradually to at least 60/40 by retirement.
  • Our primary asset classes will be domestic stock mutual funds, international stock mutual funds, and US Government bond mutual funds. Other investments to provide diversification may be used. However, at least 1/3 of our equity will remain in non-US investments.
  • We will tilt the portfolio toward mid-cap and small-cap stocks in an effort to increase returns so long as reasonably priced investments are available, both domestically and internationally.
  • We will tilt the portfolio slightly toward value stocks, both domestically and internationally. This will be maintained by the purchase of specific value stock mutual funds if necessary and so long as reasonably priced investments are available.
  • We will rebalance our asset allocation as frequently as necessary using the 5/25 rule using new investment money as much as possible. If selling in a taxable account (or selling an investment with significant trading costs) is required to rebalance, this may be performed no more than once per year.
  • Our fixed income allocation will include our emergency fund with the remainder in tax-sheltered accounts split 50/50 between nominal bonds and inflation-indexed bonds. We will use the G fund as much as possible.
  • Our equity allocation will include domestic, international, and emerging market stocks and large-cap, mid-cap, and small/micro-cap stocks. We will also allocate a percentage to REITs and other alternative asset classes if they promise diversification benefits and solid long-term returns. For the most part, these will be broad total market index funds, but they may be supplemented by small amounts of value index funds as needed to maintain a slight value tilt.
  • No asset class will represent more than 30% or less than 5% of our portfolio.

At this point we listed the actual asset allocation. As you might imagine for a military doc, we had a pretty good chunk of our investments in the Thrift Savings Plan (the federal 401(k).) We have had minimal changes since then, which long-term readers should be aware of (addition of a 5% slice of P2P Loans, and a 5% slice of small international.)

Asset Allocation:

  •  Equity (75%)
  •  Total Stock Market/C Fund 17.5%
  •  Extended Market/S Fund 10%
  •  Microcaps 5%
  •  Large Value 5%
  •  Small Value 5%
  •  REITs 7.5%
  • Developed Markets/I Fund 20%
  • Emerging Markets 5%
  • Fixed (25%)
  • Nominal Bonds (12.5%)
  • G Fund 12.5%
  • SDP as needed
  • Inflation-indexed Bonds (12.5%)
  • TIPs Fund 12.5%

Your specific investing plan doesn’t matter all that much. Perfection is impossible. You just want a reasonable portfolio such as these. But writing it down will force you to make sure you have a plan, and will help you to follow it.

Section 7: Changes (and Signatures)

It’s important to consider future changes to this plan. We’ve obviously had some, although they are pretty minimal. Here’s what our plan was:

  • Any change to these percentages or change in funds used will require a 3 month waiting period. Development of any new asset class or new funds allowing us to invest in an asset class such as international small or international value stocks will require a 3 month waiting period prior to transferring funds.

If you don’t have a written investing statement, please sit down with your partner this month and formulate one. It doesn’t have to be this long, or this complicated. And it certainly doesn’t have to be final. But if you make a plan to reach your goals, you will be far more likely to actually do so. I can’t tell you how many bad investing ideas this paragraph has helped me avoid. There are very few investments worth rushing into.

If it is a good long-term investment, it will probably still be a pretty good long-term investment 3 months from now. Then we actually, literally, signed the thing. Both of us. Stupid? Sure. But it worked, didn’t it? We became millionaires 4 years earlier than planned, so don’t laugh too much!

Need some additional guidance in creating a financial plan and investor statement policy? Consider taking the Fire Your Financial Advisor Course by The White Coat Investor.

Disclaimer: The topic presented in this article is provided as general information and for educational purposes. It is not a substitute for professional advice. Accordingly, before taking action, consult with your team of professionals.

Site Design Delightful Studios
Site Development Alchemy + Aim