Stay the Course With an Investment Policy Statement

James Brewer, CFP®, CRPC®, AIF®  Investopedia

James Brewer, CFP®, CFPC®, AIF® – May 1, 2017

An investment policy statement may be better named an emotional policy statement. However, most finance types don’t want investing to be seen as touchy feely. Finance and economics have historically been considered logical disciplines. But times have changed and there’s a new branch of economics called behavioral finance.

I find that at the beginning of an investment voyage many people are focused on investment returns. In fact most financial professionals like to tell you about the previous history of the investments they are recommending. However, many financial professionals omit the conversation about what the ride was like along the way to achieve the returns.

What Is an Investment Policy Statement?
Simply stated, an investment policy statement guides the question of what you should invest in and when should you get out: “Should I stay or should I go?” There are those that simply get out when the market turns down or their specific investment has a lower return than they hoped. Sometimes it is simply seeking the greener pastures of an investment you heard about from a friend or a financial pundit. Investment policy statements typically are associated with large institutional investing. I say, if investment policy statements are good for them why not for you?

Think of an investment policy statement as guidance for the decisions made about your portfolio. You may liken this to having a boutique store.

  • What should the store sell? Should it sell hats or hardware?
  • If it sells hardware, what kind of hardware should it sell?
  • Should it provide high service with fewer items or lower service with many items?
From a Life Values Perspective
  • Are you bothered by investments in fossil fuels?
  • Can’t stand the idea of supporting human trafficking, abortion or tobacco?
Your investment policy statement determines what investments you will tolerate. This requires working with an investment advisor who understands environmental, social and governance investing and is not limited in the investments they can bring to the table. Your investment policy statement should incorporate your values.

From an Investment Perspective

  • What is the purpose of the money being invested?
  • How much money needs to be accumulated?
  • When is the money needed?
  • Might there be some cash needs along the way?
  • Are there any types of investments that should be avoided such as tobacco and abortion?
  • Are there preferred types of investments such as sustainable?
  • Are you concerned about international investing or small companies you’ve never heard of?
  • There may be areas where you don’t have concern. However is it wise to give your financial professional carte blanche to invest in anything?
  • What risk tolerance are you comfortable with regarding this money? While you may have an aggressive risk tolerance, if you need the money in a short time, it may not be wise to be aggressive by being in all stocks.

Investment Policy Statement as Emotional Policy Statement
Long-term investing will likely be turbulent. How can you try to not have it be so nerve-wracking? Investment policy statements help address what the expected ride is likely to be. Some grouping of investments (asset classes) historically have had different risk return patterns. While bonds have typically been seen as more safe than investing in stocks, they often come with lower return. Depending on your goal and time frame, you may have to save more. If that is not possible, your goal may require adding assets with more risk to increase the expected return. Even that has its limits.

Do You Need an Investment Policy Statement?
Does this sound like you?
“People want an allocation strategy with a pattern of historical returns. An investment advisor should choose an allocation strategy for a client that:

Has an attractive pattern of returns based on the strategy’s longevity and historical risk and return results throughout the life of the strategy;
Has downside risk that will allow the client to stay with the strategy at all times; and
Has a strong possibility to repeat the attractive pattern of returns in the future.”1
If so, an investment policy statement can help you and your advisor steer your investment journey. A journey that is likely to have some turbulence. The investment policy statement will help act as the “emergency preparedness” plan, to keep you calm when the emergency occurs. The statement will help you stay the course.

(For more from this author, see: Does Mixing Faith and Finance Work in Investing?)

1. Chuck Self, iSectors Chief Investment Officer, public comments

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.