CAMP Money

Are you experiencing euphoria one moment, panic the next, followed by a heavy dose of indecision when looking at your investments? Smart investors know that they should stick to a plan and change it only when their personal circumstances and needs dictate, not on market movements. One technique that helps is the implementation of an investment policy statement.

An investment policy statement (IPS) is a written document that articulates the investor’s overall investment goals and how those goals will be accomplished. It is designed to take the emotion out of investing and keep the investor on track, regardless of what the market or the economy is doing.

An IPS should be a detailed plan, not a general statement. It should cover such specifics as investment objectives, desired annual returns, asset allocation, any tax management strategies, portfolio benchmarks, re-balancing methods, and monitoring procedures. Start by identifying your investment goal or goals: college funding, retirement saving, creating an estate, or charitable intent. Will you be making regular withdrawals for living expenses or specific ones like buying a new car or the down payment on a new home? You should consider how much you need to keep handy in cash reserves for emergencies.

Once you know where you are going and the investment need to fund it, you can determine how much to save and how much return you will need to meet your goal. Remember a portfolio is not designed to simply make as much money as possible. It should be designed to accomplish specific goals. This is where the IPS is able to restrain investors from overreaching or panicking.

The IPS will bring your risk tolerance in line with your savings need. Say you have determined that you must get a 10% return to meet your goal, but you will only invest in CDs and short-term bonds. Those investments will not generate anything like 10% in the current low interest rate environment. You may be forced to adjust your risk tolerance, perhaps to include some stocks in the mix. Alternatively you can contribute more to the portfolio in order to reach the goal. Lastly the goal itself can be changed. What role will taxes play in your investing? Do you want to keep the portfolio in a taxable account, harvesting losses to offset gains? The alternative is to consider tax deferred investing through sheltered retirement plans or annuities. Figure out when money will be needed for college, for retirement, or any other goal. All these factors will be incorporated into the IPS.

Now is the time for the IPS to identify what asset classes and investment vehicles are most appropriate for your needs. This is where you prescribe limits. You may want to rule out investment choices such as initial public offerings, junk bonds, commodities, and emerging market investments. You should determine how much stock you should own in your employer’s company. You must also determine what method you will use to re-balance the allocation when it gets out of alignment. Also the portfolio should be measured against some benchmarks. You should pick the appropriate ones. If you plan to invest through mutual funds, state whether to use primarily index funds or more actively managed ones, or what combination of the two. If you plan to use individual stocks and bonds, decide how and by whom they will be picked.

The very act of writing all this down will force you to think out your investment strategies. The IPS, if followed, will also keep you on track toward a goal, versus just floating along with no particular plan, which is what most investors do. Although a written document, and IPS is not carved in stone. It can be changed when appropriated. In the meantime it will see you through volatile times and minimize those swings of greed and fear.

This column, produced by the Financial Planning Association, the membership organization for the financial planning community, is provided by Alexander G. Yearly CFP®, a local member in good standing of the FPA. Mr. Yearley runs the office of Community Pride Financial Advisors, 39 Baltimore Ave. Rehoboth Beach, DE and offers securities through Cambridge Investment Research, Inc. Member NASD & SIPC.