To determine what qualities an investment must have before joining your portfolio, consider reviewing some of the classes in the mutual fund and stocks tracks of the Investing Classroom.
Some criteria to consider for mutual funds:
- Minimum category rating
- Minimum total return % category rank over various periods
- Maximum bear-market rank
- Maximum percentage of assets in top-10 holdings
- Maximum percentage of assets in any one sector
- Maximum expense ratio
- Minimum or maximum asset size
- Minimum manager tenure
- Minimum tax-efficiency ratio
Some criteria to consider for stocks:
- Maximum price for each stock
- Minimum return on equity
- Minimum free cash flow
- Minimum forecasted five-year earnings-growth rate
- Maximum leverage
- Minimum dividend yield
- Minimum market capitalization
- Maximum price/earnings ratio
- Minimum revenue growth rate
Any new investment you're considering for your portfolio should meet these criteria. If it doesn't, why not? Do your criteria need to be altered? Is this an investment that you shouldn't make, given your philosophy?
The Monitoring Procedures portion of your Investment Policy Statement details your plan for keeping tabs on your investments. It's your blueprint for rebalancing, and for determining what investments, if any, you should sell.
Answer the following questions:
- How often will I monitor my portfolio?
- How will I determine how well my individual investments are doing?
- How will I determine how well my overall portfolio is doing?
- How will I determine whether my portfolio is meeting my expected return?
- How will I determine whether losses fall within my accepted range?
To determine how well your individual investments and overall portfolio are doing, be sure to use the benchmarks you chose in the Executive Summary section of the Investment Policy Statement. If you find that your portfolio is not meeting your expected return, or that losses are falling outside of an acceptable range, you may need to adjust your investments.
When monitoring, don't focus only on performance. Make sure the reasons you chose these investments in the first place still apply. To do that, check the status of each investment against your Investment Selection Criteria. If a stock or fund no longer meets your criteria, it may be a sell candidate.
Revisiting your IPS
Once you've created your IPS, sign it, date it and come back to it in a year. Remember, the Investment Policy Statement isn't only your investing blueprint, it's also your portfolio's report card.
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