Managing Your Investment Portfolio: Part Five
Your Investment Policy Statement
by Gerald Townsend, Financial Editor
May 2010
Our year-long series on "Managing Your Investment Portfolio" now enters its fifth month. Previous articles discussed the necessity of setting realistic goals; judging your tolerance and capacity for risk; and understanding how time, taxes, diversification and economic considerations affect portfolio management. This month introduces the concept of an Investment Policy Statement.
An Investment Policy Statement (IPS) is a written document that serves as both a blueprint for how you intend to manage your portfolio as well as a convenient checklist or report card to periodically review in order to determine if you are adhering to your plan — or if the plan itself needs to be changed.
One of the greatest challenges to a personal financial plan or an investment plan is the discipline required to stick with a well-thought-out plan, especially when our finances or investments are battered by the whims of the market or by our own doubts and insecurities. An IPS helps you stick to your plan.
What goes into an IPS? The questions are actually more important than the answers. For an example of the types of questions you should consider, here’s a link to an IPS worksheet provided by Morningstar: im.morningstar.com/im/InvestPolicyWS.pdf
Some of the questions contained in an IPS are the same ones we have already discussed previously, such as: "What are my goals?" "How much risk do I need to take or am I willing to take?" and "What is my philosophy about diversification or taxes?"
Your IPS will also stipulate what your goal will be for your overall asset allocation, which is a topic we’ll cover in more depth next month.
What kind of investment products will you be using to implement your investment plan? Mutual Funds? Bonds? Stocks? Annuities? Your IPS should discuss the products you will utilize and why you are using those particular products. If you cannot express in a sentence or two why you prefer one type of product to another, you need to take a step back and rethink what you are doing.
When you know the types of products you plan to use, how will you select them? What criteria will you use to choose your mutual funds? Write them down. How will you determine when to eliminate a fund from your portfolio?
If you are using individual stocks, how will you craft a diversified portfolio and not just end up owning a bunch of random stocks? How will each stock be chosen? Will you follow a value or growth approach?
How will you ultimately determine if your investment plan is meeting your goals? How often will you review and rethink the overall plan? What rate of return are you trying to achieve?
Ultimately, taking the time and effort to think through your personal situation and to commit your plan to writing not only spurs you into action, but it also disciplines you to stay the course when you might otherwise abandon your plan.
Going to the gym on those days when you really don’t want to, pays dividends to your health. Sticking to your IPS, even when you don’t feel like it — pays dividends to your portfolio.
Gerald A. Townsend, CPA/PFS, CFP®, CFA® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com