How to Develop an Investment Policy Statement

One problem faced by many investors is that they do not have a clear idea of where they are headed or how they will get there. Formulating an investment policy statement can provide a clear road map for investors to stay on track and achieve their investment goals over time. A clear policy statement can make many investment decisions much easier, as investors can simply compare the characteristics of an investment with the policy to see if it fits.

Instructions

1. Consider your investment objectives. What are you trying to accomplish? Do you want your money to grow over time, or do you need income from it now? Do you want to leave a legacy to your heirs, or do you want to spend it all before you die? Determine your time frame, because the amount of time that you have to invest will substantially impact your policy. If you have less than 10 years to invest, then probably less than half of your portfolio should be invested in common stock of any kind.

2. Decide on how much risk you are willing to take. Does it matter how volatile your portfolio is, as long as it grows over time? Can you sleep at night if your portfolio drops by 30% in one month? You may need to formulate subpolicies for different segments of your portfolio. If you have one large IRA and another smaller account, consider drafting a more conservative policy for the large account and a more aggressive one for the smaller balance.

3. Focus on a specific segment of the market if it fits your objectives. Are you seeking growth from small-cap stocks that meet certain criteria? Or do you need regular income that can weather changes in interest rates? Outline a policy with specific parameters for the class, maturity and other characteristics of all securities in the portfolio.

4. Include provisions in the statement outlining what action is to be taken if severe market conditions occur. If interest rates fall below one percent, can the portfolio dabble in riskier investments, such as preferred stocks or utility stocks? If the markets drop by more than a certain percentage, can hedging instruments be employed?

5. Write up your policy statement formally and keep it with your investment and financial records. Evaluate your policy at least once a year and update it if necessary. Your objectives and risk tolerance will likely change over time, and your policy statement should reflect any shift in your investing philosophy.

References

• Financial Planning Association
• Certified Financial Planner website