“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to.”
“I don’t much care where.”
“Then it doesn’t much matter which way you go.”
“…So long as I get somewhere.”
“Oh, you’re sure to do that, if only you walk long enough.”
– Alice in Wonderland, Lewis Carroll
And that, my friends, accurately sums up many peoples’ investment strategies!
I can’t tell you how many times a friend asks what they should invest in and tells me their objective is simply “to make as much money as possible!” To which I ask, how much risk are you willing to assume? “As little as possible!”
Ah yes, that’s the dream – but a weak strategy.
You Need an Investment Policy Statement
An investment policy statement (IPS) is a written document that outlines your investment strategy. An IPS specifies an investor’s goals, priorities, and risk tolerance.
Professional advisors draw up an IPS to level-set with their clients exactly how they will be managing the client’s money. If you manage your investments on your own, you need to level-set with yourself what your investing strategy is. Writing an IPS will bring you the clarity to stay focused on your long-term goal and not become irrational yourself when the market is acting irrationally (which it often does). Clearly defined objectives give you peace of mind as an investor. An IPS is your roadmap to success.
What is Covered in an Investment Policy Statement
An IPS specifies target asset allocation, which is the mix of investments by type (i.e., stocks, bonds, etc.). The IPS also dictates when and how to rebalance your portfolio. A general guideline is to rebalance a portfolio at least annually.
Here are some questions to ask yourself when defining your investment strategy:
- What is the purpose of the investment?
- Is there a specific goal or objective in mind? Are you investing for retirement?
- What is your time horizon? If your objective is retirement, when do you plan to retire?
- What are your liquidity requirements?
- Do you have a considerable upcoming expense for which you will need to access your money? An example could include buying a house or paying for college.
- What is your risk tolerance? Said another way, what is your ability to withstand losses for any period? Some things to consider:
- What is your primary source of income? Do you have a full-time job or another way to cover your expenses?
- What is your net worth?
- How close to retirement are you?
Every person needs to start their investing journey by writing an IPS. A well thought out IPS enables an investor to stay focused on their long-term objectives, even while the market gives them a wild ride. Developing a reliable IPS requires a lot of thought, but it is well worth the effort. Remember: failing to plan is just as good as planning to fail.