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How to Write an Investment Policy Statement

by Miranda Marquit

One of the cardinal rules of investing is to leave emotion out of it as much as you can. Once you start letting emotion rule your investing decisions, you end up with clouded judgement – and a greater likelihood of losses.

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Investing can be complicated, but creating a set of goals and guidelines can help you stay the course.

In order to reduce the role that emotion plays in your investment decisions, it’s a good idea to develop an investment policy statement. An investment policy statement codifies your goals and strategy, offering you a plan to follow as you manage your portfolio – no matter how large it is.

Your investment policy statement can provide you with guidance, and it’s a great tool to fall back on when you start getting nervous about your portfolio.

Define Your Long-Term Goals

The first thing you need to do as you write your investment policy statement is to identify your long-term goals. What do you want your money to accomplish on your behalf? Whether you are planning to buy a home or whether you want to save for retirement, define the goal.

Figure out what needs to happen – in terms of your investment portfolio – to reach your goals.

Recognize Your Risk Tolerance

Now that you know what your goals are, you need to consider your risk tolerance. Your risk tolerance should take into account the time horizon for achieving your goal, as well as what you can financially handle. Don’t forget to include your emotional risk tolerance.

Once you know your risk tolerance, you can use that to guide your investment choices. Stay away from investments that are too risky for your tolerance level – no matter how exciting they seem. Additionally, recognizing that you might be too averse to risk can help you create a plan that corrects this issue and helps you grow your wealth more effectively.

Create Guidelines for Asset Allocation

Use what you know about your goals and your risk tolerance to create guidelines for your asset allocation. Write down your guidelines regarding how much of your portfolio should be in stocks, bonds, and cash. If you are interested in adding real estate, commodities (like gold), or currencies to your portfolio, include that information as well. Once you have settled on your asset allocation, use this statement to rebalance your portfolio once or twice a year.

Don’t forget that asset allocation should change over time. You need to shift your asset allocation as you approach your investment goal. Create a timeline for changes to your asset allocation as you progress through life. Knowing what you plan to do next, in terms of asset allocation, will help you stick to a solid plan for your money and keep you from deviating to chase after less-sound alternatives.

Write an Action Plan

Once you have come this far, it’s time for the action part of your investment policy statement. Create an action plan that sets forth how much you will invest each month, and which assets you will invest in. Use dollar cost averaging to make the most of your money. Divide up your monthly contribution according to your stated asset allocation strategy.

How much you contribute each month should be based on your risk tolerance, as well as on your stated goals.

If you write your investment policy correctly, it should be a somewhat succinct statement that guides you through your goals and risk tolerance, then helps you pick an asset allocation, and then finally lays out your ultimate plan for investing. You should be able to keep it to a single page.

Keep your investment policy statement somewhere you can access it easily. It helps to review your policy statement before you make any decision about your portfolio.

Are you ready to write your investment policy statement? Roughly, what will it look like? Leave a comment!

Photo Credit: kenteegardin


Published or updated May 3, 2013.
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{ 2 comments… read them below or add one }

1 Jake Erickson

This is very well-timed article for me. My wife and I were just discussing this exact thing this past weekend. Hopefully by the end of the summer we’ll be able to begin investing and we’ll definitely utilize these steps to create a plan. I think our plan will consist of mostly mutual funds just because that’s what I understand and there are many different options within this one investment vehicle. Plus, it can get you a pretty high return with less risk than individual stocks.

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2 Josh Stelzer, CFP

@Jake

Also consider ETF’s versus Mutual Funds. Same diversification advantages, but at a much lower cost. Mutual funds typical range from 1.00 – 1.35% in expense ratios per year. You never see these fees deducted from your account, but you do pay them. ETF’s come in around 0.15 – 0.50% in expense ratios. Saving money always helps!

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