Why Do You Need an Investment Policy Statement
The purpose of an investment policy statement is to turn your investment strategy into a measurable plan. It can protect you from emotional decisions driven by fear and anxiety, and can serve as your roadmap for future choices about what to do with your money, no matter what happens in the stock market. Here’s how to start collecting them.
Start with your goals
Before you start investing – or making changes to any existing investment – write down a list of your family’s financial goals. For example, you might have short-term investment goals, such as saving enough money for a down payment on a house or paying for a wedding a few years later. Your child’s college education may be a medium-term goal. You may also have a long-term goal of retirement in 30 or 40 years.
Try to estimate how much money you need for each goal. Short-term goals may be easier to achieve because inflation will be less of a problem. But you can use an online calculator to estimate the potential value of your medium to long term goals – and you should expect what’s on the list to change over time. (This is fine.)
Consider your risk tolerance
You should also think about your risk tolerance, which measures how large fluctuations in the markets you can handle. Be honest: do you check your 401 (k) balance every time the stock market fluctuates? This may indicate that you have a lower risk tolerance. But if the latest news doesn’t bother you, you may be willing to take more risks. Vanguard offers a free risk tolerance survey to help you get started.
Select asset allocation
When you have a better sense of your family’s goals, including your time horizon and risk tolerance, it will be easier for you to choose the perfect mix of investments for each goal. This is also known as target asset allocation.
You can get inspiration from Morningstar’s research-backed asset allocation for your retirement portfolio. There’s a good explainer on how to choose an asset allocation for a college here . This article can help you achieve your shorter or medium term goals.
Select your attachments
Then set the investment selection criteria. For example, you might prefer mutual funds over individual stocks. You can also give preference to passive investments over active ones . You can set guidelines for your ideal spending ratios – for example, 0.20% for passive investments.
Make a monitoring schedule
Decide how often you will view your portfolio. You must control your investments at least once a year, but not more often than once a month. As the stock market changes, you may notice that your asset allocation no longer matches your target interest rates.
For example, if the stock market is doing well, you may have too high a percentage of the stock. This could be an opportunity to change the balance or return to the original percentage values. You can do this by selling some of your shares and replacing them with additional bonds, or vice versa.
You will want to consider rebalancing as soon as your investment has moved more than 5-10% of your target. However, before making changes, you should always consider the tax implications: in a taxable account, such as a brokerage account, the sale of an investment may result in capital gains taxes. But if your money is in a deferred tax account like your 401 (k), you won’t have a problem until you withdraw your money. The same rule applies to tax-free accounts such as the Roth IRA.