Related topics: funds, stocks, mutual funds, 401k, portfolio
Big organizations create them for their company retirement plans. Financial advisers craft them for their clients. They require some philosophizing and number crunching. And when done thoughtfully and comprehensively, they can be 15 pages long.
What are "they"? Investment Policy Statements, or IPSs.
An IPS isn't only for the well-heeled who love paperwork. It's a must for all investors. That's because creating an Investment Policy Statement forces you to put your investment strategy in writing and commit to a disciplined investment plan. It's both a blueprint and a report card.
We can't cover everything that you'll need to include in your Investment Policy Statement in just one class. But by downloading, printing and filling in Morningstar's Investment Policy Statement Worksheet (.pdf file), you'll have a good start.
If you've been taking classes in the Portfolios Track of the Investing Classroom in order, you'll already know the answers to many of the questions presented in the Investment Policy Statement. But don't worry if you haven't taken previous classes. We'll tell you which classes you'll need to review to answer these questions.
Executive summary
The Executive Summary provides an overview of your situation and what you expect from your portfolio. It's a snapshot in time. Update your Executive Summary whenever you rebalance your portfolio.
Here are the questions to answer:
- What are the assets of my portfolio today?
- How much do I plan to invest each month?
- How many years will I be investing?
- How much do I expect my portfolio to return each year over inflation?
- How much of a loss can I accept over a three-month period, a one-year period and a five-year period?
- What is my target asset allocation?
- What are my benchmarks for my portfolio?
To help you answer the first six questions, review the following classes:
When it comes to answering the final question, choose your benchmarks wisely. Say you have a portfolio that's 40% invested in U.S. large-company stocks, 10% in U.S. small-company stocks, 30% in bonds and 20% in foreign stocks. Don't use the Standard & Poor's 500 Index ($INX) as your portfolio's benchmark. It's inappropriate. After all, the S & P 500 is made up strictly of large U.S. companies. The S & P 500 may be a suitable benchmark for the 40% of your portfolio that's composed of U.S. large-company stocks, but not for your entire portfolio.
