For the record, this has been one of the longest running bull markets in the history of the stock market. But last month, a sudden and dramatic 1,500 point drop in one day (from the Dow’s all-time high) followed immediately by a quick rebound in the same week got everyone\u2019s attention and rattled nerves.<\/p>\n
We know that the best way to make money is to not lose it. When you\u2019re wealthy, you can save yourself from making the most common and costly investing mistakes hiring an expert who manages risk by setting the boundaries for you. In fact, it\u2019s one of the first things a competent investment advisor will do for you by drafting an explicit investment policy statement because they know it is critically important to have one.<\/p>\n
Pension funds are arguably managing consumers’ most serious money, and they\u2019re required to produce detailed investment policy statements that govern how those trillions of dollars in retirement money will be invested and monitored to make sure their own rules are consistent with the goals of their individual investors. Committees meet and spend hours reviewing the details of these policy statements at least once a year.<\/p>\n
Mutual funds and big hedge funds also have to create their own guidelines, as do family offices because they know it\u2019s an essential step in the investing process. But having an investment policy statement is not reserved for the super wealthy. Everyone who has money in the stock market should establish some basic investing ground rules and make those rules their own.<\/p>\n
Why it has to be in writing<\/strong><\/p>\n The purpose of an investment policy statement is to set guidelines for your investment portfolio before the stock market takes a violent, sudden turn. It\u2019s an overarching strategy that represents your commitment, and it\u2019s to prevent you from making emotional financial decisions that most often lead to huge financial losses. Not only is it your blueprint, but it\u2019s also a report card or measuring stick to help you see how your strategy is working. Chances are if you\u2019re working with a financial advisor who is a true fiduciary, he or she has already created one on your behalf or will help you craft one, but ultimately, it\u2019s your plan. The input has to come from you. Since you\u2019re setting your own boundaries and limitations, this statement may help you determine whether or not your advisor makes the grade. You can simply re-create your investment policy statement to assess whether your advisor\u2019s meeting your expectations all based on, but separate from the guidelines your advisor created for your portfolio. For example, measuring the value of the guidance you\u2019re getting compared to the fees your paying him.<\/p>\n It\u2019s your personal policy statement that sets forth what you\u2019re really trying to accomplish with your money, whether it\u2019s to protect or grow your investments or both. It\u2019s your goals that drive the process by which you can then review the performance of both your investments and your advisor. Your IPS should be crafted with a long time horizon in mind because it\u2019s all about stability, so attempting to cater to short-term market panics undermines the whole purpose. Without a firmly set plan, it becomes much easier to lose our way and fall victim to such times of panic, even though on some level you know not to react to day-to-day headlines. The point is to put limits on what you\u2019ll put up with and what investing behavior you won\u2019t accept. Maybe you\u2019re passionate about the future Bitcoin but not to the point where you\u2019ll allow yourself to risk more than say, 1% of your entire life savings on crypto-currencies.<\/p>\n What\u2019s in your investment policy statement?<\/strong><\/p>\n To create an investment policy statement, you simply define your limits by stating in writing what you will and will not tolerate. Basically, you draw the lines in the sand\u00a0before<\/em>\u00a0any investment decisions are made, and you do\u00a0not<\/em>\u00a0cross the lines. Here are some of the most common sections of an IPS:<\/p>\n Most investors may be looking at this list right now and wondering how they\u2019re supposed to come up with their own IPS. It isn\u2019t as hard as it sounds. Start by creating a list of investment goals. For example, say you\u2019re 45 years old with two kids. You have some money in your 401k and other savings accounts, and you\u2019re trying to both save enough for retirement and fund two college tuitions. Those are real goals that have deadlines. Get your advisor to help you develop your guidelines based on those goals, what you have already invested, and what you can afford to contribute going forward. You\u2019ll need a plan for meeting each of those two goals. It will move you in that direction and make you committed to saving the amount of money you\u2019ll need to put toward each goal every year while also providing the flexibility to adjust your plan for changing your investment guidelines if your income changes.<\/p>\n Not having an IPS would be like taking a cross-country road trip using only unpaved roads. The stock market\u2019s been on fire for more than eight years. This is a good time for individual investors to set their own boundaries.<\/p>\n","protected":false},"excerpt":{"rendered":" For the record, this has been one of the longest running bull markets in the history of the stock market. But last month, a sudden and [\u2026]<\/span><\/p>\n","protected":false},"author":2,"featured_media":1565,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[],"yoast_head":"\n\n