A successful financial plan doesn’t necessarily have to be--and in fact shouldn't be--overwrought.
If you can't distill the basics onto a 4"x6" index card, you're probably overthinking it.
Investors can benefit from fleshing out the parameters of their investment
strategies by crafting investment policy statements. Financial advisors often prepare
complicated investment policy statements for their clients, complete with appendixes, footnotes, and
legal disclaimers. But yours needn't be overwrought.
Rather, at its most basic and useful, the statement documents the parameters of your investment plan: the asset
allocation framework, criteria for selecting securities, and the system to maintain those investments on
an ongoing basis. Used in conjunction with a master directory,
the statement can be an invaluable tool for keeping tabs on your investments. Such documents will also
aid your loved ones if, for whatever reason, they need to be able to obtain a quick and thorough
overview of your investment plan.
If you've been an "investment collector," rather than an investment planner, up until now, it's not too late to think
through your approach and commit it to writing.
Here is an
investment policy statement template you can use to document your strategy, but you can also customize
your own in a Word document. If you're investing for multiple goals--retirement as well as college, for example
--it will probably make sense to create a separate one for each goal.
statement isn't likely to contain as much personally identifying information as a master directory, it's
still valuable to protect these documents. Note that our template is designed for users with access to
Adobe Acrobat, which enables password-protection for documents. If you are opening this template with
Adobe Reader (rather than Acrobat), print the document and write in the fields provided. Then store the
document in a safe location, such as a locked file drawer or safe deposit box. Alternatively, if you'd
like to customize your document, set up a file with similar fields in Microsoft Excel or Microsoft Word.
Both programs enable password protection for your document.
No matter what format you use for your directory, be sure to follow these steps.
Step 1: Document
Documenting your goals might seem straightforward, but there's more to this section than meets the eye.
Quantifying how much you'll need for retirement is particularly complex, requiring you to forecast not just unknowables
such as your life expectancy and rate of investment return, but also to factor in your own variables,
such as how your spending might change in retirement and whether you have nonportfolio sources of income
such as a pension.
Step 2: Outline your investment strategy.
An investment strategy for accumulators, for example, might be "To invest primarily in low-cost index funds,
increasing contributions along with salary increases. Begin with an 80% equity/20% bond mix,
transitioning to 60% equity/40% bond by retirement."
An investment strategy for retirees might be "To invest in dividend-paying equities and bond mutual funds to deliver a
baseline of income; regularly rebalance to provide additional living expenses. Target a 50% bond/50%
Step 3: Document Current Investments.
Here you're documenting all of your accounts of a given type, as well as their most recent values. While our template requires you to
amalgamate all of your accounts of a given type--the IRAs for both you and your spouse, for example--you can append pages to create a more granular view of your holdings.
Step 4: Document Target Asset Allocation.
Because your portfolio's actual asset allocation is going to bump around a bit based on market performance (and,
perhaps, active asset allocation decisions from you or your fund manager), it's sensible to express your
target allocations to each asset class as a range rather than a specific target. If your range for
equities is 65% to 75%, for example, that means you'll rebalance when your equities weighting goes below
65% or above 75%. For the major asset classes, a range of no fewer than 5 and no more than 10 percentage
points is sensible.
Setting your allocations to U.S. stocks, foreign stocks, bond, and cash is the main job here. But for investors who
would like to embed "tilts" into their portfolios--toward small-cap or emerging-markets equities,
perhaps--we've also included lines for you to specify how much you'll dedicate to each of these
Step 5: Outline Investment Selection Criteria.
Use this area to specify the characteristics that you'll look for in each investment type (and that you'll hold them to,
on an ongoing basis).
You needn't specify parameters for each of these areas included on our template--for example, if you invest
exclusively in index funds, you'd skip the sections related to management tenure and might instead
specify that your holdings should each have expense ratios of less than 0.20% per year.
Step 6: Specify Monitoring Parameters.
Implicit in outlining all of the above policies--from asset allocation to investment-holding specifics--is that you'll periodically
check in on your portfolio to ensure that it still passes muster.
In this section, you'll specify how often you'll check up on your portfolio. Less is more, in my view, which is why the
maximum monitoring frequency included here is monthly. You'll also outline when you'll rebalance. Rather
than rebalancing at specific time periods, you might want to rebalance only when exposure to the major asset
classes is 5 or 10 percentage points from the targets. (If you've set target ranges for your asset
allocation in the section above, that will determine your response in this section.)
And because the best portfolio checkups are focused, it's best to specify what you'll look for as you review your
portfolio. You may want to start by focusing on the most important variables, like whether the portfolio is on
track to meet its goals and whether its asset allocation is in line with the target range. Then, if time
permits, you can focus on smaller-bore issues, such as your portfolio's performance relative to a
benchmark with like-minded asset allocations.