In most cases, you'll need to use a combination of benchmarks to measure the success of your portfolio as a whole and the success of your individual investments.
You'll also need to decide over what time periods you want to benchmark your portfolio and your investments. Do you want to benchmark your portfolio's annual returns? Its three- or five-year returns? Some combination thereof? We recommend keeping abreast of your returns yearly, but focusing mostly on longer-term results.
Investment objectives
The Investment Objectives portion of your Investment Policy Statement details what you're trying to achieve and in what time frame.
Answer the following questions:
- What is my financial goal?
- How long will I be funding this goal?
- How much will this goal cost every year?
To help you answer these questions, review Portfolio 102: Determining your goals and what they'll cost.
Investment philosophy
In the Investment Philosophy section of your Investment Policy Statement, you'll articulate what's important to you as an investor. These are the theories you believe in and plan to follow.
Here are just a few questions to consider:
- What's my philosophy about risk?
- What's my philosophy about core versus noncore investments?
- What's my philosophy about diversification?
- What's my philosophy about trading?
- What's my philosophy about costs?
- hat's my philosophy about taxes?
Before you buy or sell any securities, make sure that your actions reflect your philosophy. If they don't, ask why. Maybe you shouldn't be buying or selling that security. Perhaps your action is based on short-term performance, or a hunch about what the market is going to do. But your actions should be based on your Investment Philosophy.
Investment selection criteria
The Investment Selection Criteria section of your IPS includes your rules for choosing investments. These rules will vary significantly from investor to investor, based on each investor's Investment Philosophy. Think of these criteria as a means of quantifying your philosophy.
