Investment Policy Statement

by ABC

One of the key points to being a successful investor is to create an investment strategy (no matter how simple it might be) and stick to it.  Your strategy could involve something complicated like trading options or something simple like putting $100 into an index fund every month.  It can be difficult to stick to your original strategy for several reasons:

  • Memory – it’s not easy to remember a strategy that you came up with several months or years ago.
  • Greed and Temptation – if you have a conservative strategy and the market is going straight up then it can be difficult to stay with the original strategy.
  • Losses – tough markets make for tough investing.  It’s easy to forget or dismiss your original plan when the going gets rough.

Create and write down your investment policy statement

The answer of course is to write it down and review it on a regular basis.  Annually, quarterly, daily – whatever works for you.  If you don’t know enough about investing to create an investment policy then fill in the sections you do know and keep learning!

Keep in mind that it’s ok to change your policy once in a while – the one you start out with after graduating college might not be sufficient 20 years later.

How to create an investment policy statement

The policy statement should have the following information:

  • Purpose:  What is the money intended for?  Retirement?  New house fund? Children’s education?
  • Investment time horizon:  When will the money be needed?
  • Asset allocation:  Will the portfolio be all stocks or all certificates of deposits or some combination?
  • Rebalancing:  How often will you rebalance?
  • Return expectation:  This section is optional but if you have an idea of what kind of return you are expecting then write it down.
  • Investments:  This section should outline what type of investments are eligible for your portfolio – ie large cap stocks on the S&P 500, index funds, etfs.
  • Benchmarks:  Another optional section – If you are an active investor then you might choose to measure your portfolio against an appropriate set of stock and bond indexes.

Sample investment policies

Here are a few sample investment policies I’ve created:

I recommend signing up for a free Morningstar membership, which will allow you to research more about all kinds of investments.

Morningstar Stock Fund Investment Research

Photo credit: Gregorio S

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