Do I Need an Investment Policy Statement?

Once you’ve created your Risk Profile and understand your investment temperament, the next thing you’ll want to do is create an Investment Policy Statement. This is a personal document that will guide an individual investor in their investment decisions. 

Developed from a thorough analysis of your goals and values, this statement is the guiding light for your investment decisions. It should be reevaluated regularly, as your goals and values may change over time as your own circumstances change. 

An intentionally crafted Investment Policy Statement will help you know how to invest, when to invest, how your risk profile fits into your strategies, and even the actual allocation percentages of your investment dollars, including the level of detail and any exclusions you specify.  For example, the statement could say that your investments will exclude rental investments, certain types of stocks, or that you don’t want to consider risky cyber currencies like Bitcoin. 

This will help you handle the different investment questions that life throws at you, such as when you hear about some hot tip from the news or hear you friends talking about their new investments. “I’ve harvested $10,000 in Bitcoin,” one of them boasts. “I got a great lead on some oil and gas penny stocks,” another will say. Many times, you’ll want to “get in” and if you haven’t poured a solid foundation by creating an Investment Policy Statement, then you’ll have no guideline from which to make that call.   

If you’ve set the rules to the game ahead of time by creating your Investment Policy Statement, you can simply respond:  “I’m sorry, that doesn’t fit within my Investment Policy Statement,” you’ll say. “My advisor says that doesn’t match up with my investor profile or my ultimate investment goals, so I’ll have to say no.”  Or, maybe you’ve allowed for such speculative opportunities ahead of time but have limited them to a small slice of your overall investment strategy.  Either way, you’ll have a preset plan and you’ll be way ahead of your hype-driven friends. 

Allocating Your Investment for Different Goals 

All investments have different goals underlying them. This means they each have a unique timeline, purpose, risk level and investment type. 

Let’s say for example you have two main goals: saving for college (10 – 15 year horizon) and saving for retirement (30 year horizon).  An investment policy statement might specify something like this. 

For the next 30 years, I will invest 15% of my income. Of that 15%, 6% will go into a 401(k) retirement plan, which has a 3% match from my employer. My retirement has a 30-year time horizon, so this money will be invested aggressively. Another 6% of my income will be invested in a college savings account with a moderate portfolio of low-cost ETFs (exchange traded funds), which will be diversified into 60% equities and 40% bonds to manage volatility while still maintaining acceptable growth.  Finally, the last 3% will be saved for opportunistic investments. The money will sit in cash or cash alternatives such as short-term treasury bills, money market funds or life insurance cash values as I wait for opportunities to arise.  

In this example, our investor has chosen to siphon a small portion of his investable money for those more speculative investments – the hot tips his friends have— like real estate, investing in startups, or even cryptocurrency.  He might only have a couple thousand dollars in that “sleeve”, which doesn’t seem like much, but if he ends up losing it he hasn’t seriously damaged the rest of his retirement plan.  

An Investment Policy Statement can help any individual investor, and is especially key for entrepreneurs, business owners, and people who have grown their wealth.  You don’t have to look too hard to find a recent news story about a pro athlete or lottery winner who wasted their signing bonuses on fancy cars and poor investments brought by their friends; we can do better. 

The statements can be as in-depth or superficial as you need. It can go anywhere between spelling out exactly the holdings you’ll have and how you’ll invest over the years, or it may just cover the different buckets of money for one’s financial life. 

Regardless of its complexity, your Investment Policy Statement will be the playbook for your financial future, ensuring you follow best practices to keep your money, earn more of it, and avoid being led down a path that could undo everything you’ve worked so hard to grow and maintain. 

You can find an example Investment Policy Statement and instructions on how to create one in interval 1 in JBWealthFIT. Or, if you need help please call your JarredBunch advisor.

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