STEP 1: Investment Policy Statement

Overview: The first step in developing an investment plan is drafting a policy statement that clearly defines your financial goals, including short-term, intermediate-term, and longer-term.  A policy statement that explicitly states what you intend to accomplish will help keep you on track.  An investment policy statement need not be a lengthy report, as a one-page list of your goals and objectives will suffice.  The basic steps for writing a policy statement are listed below:

STEP 1: Define your investment goals and objectives in an investment policy statement.  Use SMART (Specific, Measurable, Achievable, Relevant, Time-Bound) characteristics.

  • Purpose Statement: Begin your document up front with a short statement defining the the purpose of the document
    • Example: This document is intended to provide guidance and direction for the investment of resources for [insert name] to achieve the following objectives.
  • Goals: Write out multiple SMART objectives for your savings and investments.  Make your objectives are specific and time-bound.  Include multiple objectives – both short and long-term – related to different financial goals with varying time horizons.
    • Example 1:Build a portfolio that provides [X amount] in pre-tax monthly income through dividends, interests, and rents by the retirement age of [insert age] so I can live comfortably and affordably [without needing to rely on my children to bail my ass out].
    • Example 2: Accumulate enough wealth by age [##] to leave [insert amount] for my children and/or grandchildren, that will be distributed to them over 5-10 years.
    • Example 3: Build an emergency fund of [X amount] within [X years].  [Note: Emergency fund amounts will depend on personal circumstances, but are often estimated as between 3 and 12 months of personal expenses.]
    • Example 4: Save [X amount] within [X years] to be able to fund my children’s college/education expenses.

STEP 2: Define your asset allocation parameters for aforementioned goals.  Your asset allocation parameters will vary depending on the goal and time horizon, and the amount of risk you can tolerate.  Your parameters may need adjusting after major life changes or events, such as having children.

  • Example 1: Emergency Fund (single, no kids) – I will always, without exception, maintain at least XX months of expenses in cash, cash equivalents, and short-term investments so that even amid unforeseen circumstances, I will be able to buy groceries, shelter, gas, and/or medicine. I will allocate no more than XX% of this to equities (index funds and ETFs) and I will maintain at least XX percent of this as cash in a savings or money market account. For low risk, short-term investments, I will focus more heavily on short-term fixed income assets (e.g. bonds or treasuries) with a small
  • Example 2: Retirement Savings – Through age 40, I will pursue an aggressive strategy that allocates at least XX percent of my portfolio to U.S. and international stocks using low cost index funds and ETFs.  Approximately XX percent will be allocated to real estate (apart from home ownership) through Real Estate Investment Trust (REIT) ETFs.  I will allocate no more than XX percent of my portfolio to fixed income assets such as Treasury bonds, municipal bonds, corporate bonds, and Treasury Inflation Protected Securities (TIPS).  After age XX, I will adjust my asset allocation to XX in equities, XX in fixed income, XX in real estate, and XX in gold/commodities.  [Note: Experts often disagree on the value of gold in a portfolio.  Gold is considered a store of value, and a diversifying asset that is less likely to correlate with other assets, but generally will not provide a dividend yield for income purposes.]

Step 3: For each goal, define the frequency and approach you will use to rebalance your portfolio.  Some rebalance on a set schedule, while others rebalance when their allocation diverges from the stated plan by a certain percentage.  [Note: When and how you rebalance will differ between taxable and non-taxable accounts.]

  • Example 1: I will rebalance my portfolio at least annually, but will consider selling ETFs and purchasing a somewhat (but not “substantially”) similar asset after large losses. I will also consider rebalancing after market shifts that result in changes above 5% of desired allocation for a particular asset.
  • Example 2:   I will rebalance my portfolio whenever the percentage of an asset in my portfolio has diverged by 5% or more from my desired asset allocation.


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