• Writing an Investment Policy Statement IPS

    Many members of the DFF board ask how to get started on Baby Step 4. They think that they must have multiple college degrees or be a math whiz in order to understand investing. While it is true that researching and reading about the topic will give you more insight and knowledge, your Personal Investing Philosophy is probably already something you know you just havent written it down yet. So I encourage you to write it up and have your own Personal Investing Statement. (also known as an Investment Policy Statement).

    I first came across this concept when I became a member of the Boglehead Forums. The Boglehead Forums are a place for investing geeks to come together to discuss savings, investment, and all sorts of other savings and purchasing decisions among a like-minded community. The Boglehead community is (IMO) very similar to the DFF/TMMO community, as they believe that self-education is critical, and no one cares about your money more than you do. So they follow the investing ideas outlined by John Bogle (the founder of Vanguard Funds, the biggest Mutual Fund company in the US).

    I choose to call it a Personal Investing Statement because this is about YOU your investing knowledge, your investing beliefs, your investing fears, and your personal relationship with saving and investing for your future. Having a written PIS can help you act consistently. And consistency leads to success in investing, just as it does for paying down debt.

    As the Wiki page on the Boglehead site says: A properly drafted IPS provides support for following a well-conceived long-term investment discipline, rather than one that is based on false over-confidence or panic in reaction to short-term market fluctuations.

    I had to ask myself questions such as:

    - How do I think about investing for my future and retirement?
    - What methods are available to me?
    - What other aspects of my family, my employment, or my health might have an impact on how I put these principles into practice?

    In many ways, I was already doing many things right. I was saving for retirement already. I started in my 20s and continued in my 30s and 40s. I preferred automating my contributions and used the same investment house as my employer did. But Id kind of stumbled into that plan and now I wanted to codify what I believed.

    IPS can be complicated, or they can be simple. But they should be actionable you should be able to say Am I abiding by my IPS when I sell this fund? Am I abiding by my IPS when I calculate my balances and net worth every payday? Am I harming my ability to stay the course by reading too many financial reports?


    So lets get started. My IPS ultimately had five sections:

    1) Investment Philosophy: How much of your salary? How often will you trade? What sort of funds will you invest in? My answers:

    - My goal is to save 15% or more of my gross salary in retirement funds
    - I will use a buy-and-hold strategy
    - I will purchase low-cost index funds

    2) Risk Tolerance: What sort of risk tolerance do you have? How many years until retirement? Do you have any pensions? Do you have other savings? Do you expect to have any inherited money? What would you do if your investments lost half of their value in a week?

    My Risk Tolerance is High (My account is currently invested in 80% stocks, 10% bonds, and 10% cash, as I believe my government pension serves a similar function in the totality of my investment plan).

    If you have a lower Risk Tolerance, I'd assume a higher portion of your investments is in bonds. (Bogleheads frequently recommend your age in Bonds as a percentage of your portfolio, maxing out at 50% of your portfolio).

    3) Asset Allocation: Over what sectors do you plan to invest? Typically, that would be US Domestic Stocks; International Stocks (including Emerging Market funds); and Bonds. If you want a portion of your investments in Real Estate (but dont want to be a landlord) one way to do that is to invest in Real Estate Investment Trust funds). My asset allocation is noted below.

    - 35% US Domestic Stock fund (Spartan Total Market - FSKAX)
    - 22% International (11% FSPNX and 11% FKEMX)
    - 13% Tech and BioTech (FBSOX and FBIOX)
    - 10% Real Estate Investment Trust, REIT (VGSNX)
    - 10% Bond Funds
    - 10% cash

    4) Review Frequency: How often will you be checking your investments? Daily? Weekly? Monthly? Annually?

    I decided that a monthly review made sense for me since more frequent checkups might lead to impulsive trading or decision-making. Also, my contributions were made on a once-a-month basis, and I wanted to ensure that they were being received and credited properly.

    5) Rebalancing: At what trigger would be sufficient for me to say that my asset allocation was no longer within my tolerances? How would I know it was time to sell high so I could start again on buying low?

    I decided that the market has a certain amount of variation so, when any of the sectors are (plus) or (minus) by 5% as a percentage of the portfolio target, I should sell some funds to buy back to my original investment ratios.

    Important Note: All of my retirement funds are in tax-deferred accounts, so I do not need to think about taxation rates, or long-term vs. short-term capital gains taxes owed. If you are buying and selling in taxable accounts, be sure you understand the taxation rules.

    So, thats it my personal investing statement! It summarizes to one sheet:

    Investment Philosophy: To save at least 15% of my gross income each month, using payroll deduction. I will do so by buying and holding low-cost index funds.
    Risk Tolerance: My risk tolerance is high, due to a generous government pension, and long-term savings already in hand.
    Asset Allocation: My Asset Allocation is:
    - 35% US Domestic Stock (FSKAX)
    - 22% International (11% FSPNX & 11% FKEMX)
    - 13% Tech & BioTech (FBSOX and FBIOX)
    - 10% Real Estate Investment Trust, REIT (VGSNX)
    - 10% Bond Funds
    - 10% Cash
    Review Frequency: Monthly
    Rebalancing: When any allocation is more than 5% off the bands as outlined above.
    Special Considerations: I have health issues that mean I may be medically retired by 60 so a larger-than-normal savings rate, and a more aggressive allocation until age 55, is part of my plan.


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    If you are new to Debt Free Fanatics, and want to learn more about techniques for getting out of debt, we encourage you to register and participate in our forums. Our members have been managing their money for years and are happy to offer advice and instruction on how you can manage your money better and get out of debt.