Do you have a written plan in place to guide your investment decisions? If not, how will you know if your investment plan is on track to meet your financial life planning goals? An excellent way to make sure that you follow an investment plan and have a measurement stick in place to track your progress is to setup an investment policy statement.
It’s often said that you don’t have a real plan until you put it in writing. This is especially true when it comes to investment planning. Foundations, pension plan advisors, and institutional investors are generally mandated by law to have written investment guidelines. But despite shouldering the burden for retirement savings, only a minority of individual investors actually have an investment policy statement to guide them on the path towards important life goals such as retirement or funding a child’s education. It is no surprise then that our research indicates that only 1 out of 3 investors are confident that their investments are allocated appropriately.
What is an Investment Policy Statement?
The Bogleheads investment site defines an IPS as “a statement that defines general investment goals and objectives. It describes the strategies that will be used to meet these objectives and contains specific information on subjects such as asset allocation, risk tolerance, and liquidity requirements.” An investment policy statement typically answers the following questions:
* How much do you intend to invest each month?
* How many years will you be investing?
* What is the expected rate of return for the portfolio?
* What is your target asset allocation mix?
* What are your allowable assets?
* Which no-load index mutual funds or ETFs fit into those asset categories?
* What are the benchmarks for the portfolio (DJIA, S&P 500, Russell 2000, MSCI EAFE, etc.)?
* How often will you review your investment plan? * Will you take advantage of automatic contribution rate escalator features in your 401k?
* When will you re-balance your portfolio?
One of the most important functions of an investment policy statement is to set guidelines in advance to prepare for a constantly changing market environment. Otherwise,without a plan, short-term volatility and emotional reactions to the news of the day can create major obstacles on the path to long-term goals. For example, the temptation can be strong to be aggressive when the stock market is doing well and conservative when the market isn’t doing so well but that can lead to buying stocks high and selling them low, which is the opposite of what you want to do. That is why you need to put your investment plan in writing and create an investment policy statement to guide your investment decisions for a time when emotions might be clouding your judgment.
If you do not have a written set of guidelines for current and future investments, you should go ahead and put your game plan in writing. (Check out the Morningstar worksheet and statement templates if you are looking for a basic template to create your statement.) Finally, don’t “set and forget” your plan as it will frequently change or need to be altered over time. The next time you review your investment performance, take a few moments to review your investment policy statement as well.
Financial literacy is a major concern these days and global economic uncertainty coupled with this widespread lack of financial knowledge has led to doubt as to how to manage long-term investments. A combination of increased financial knowledge and a written investment plan may just be the answer for investors seeking guidance. Just remember, when in doubt, write it out!