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Having a clearly defined strategy is very good for your investments and finances. It is essential to have goals and a long-term vision.
An Investor Policy Statement (IPS) is a tool helping you do just that. It is a way of writing down why and how you are investing. Your IPS helps you have a clear view of why you are investing and how you should invest in attaining your goals.
When I started investing, I wrote down my Investor Policy Statement. It took me about two hours. It was an excellent exercise for me.
In this article, I show you my IPS and explain precisely the goals of an IPS. Each statement will be different because each investor is different. You can follow my example to start your own. But you still need to think about each point and adapt it for your own needs.
Investor Policy Statement
First of all, what is an Investor Policy Statement (IPS)? It is a set of guidelines for your investing. It will state how you are going to invest and why. It should also state how you will react to some events.
Secondly, why would you need an IPS? The reason is to keep you on the right path when a situation trigger. If you have already thought of the problem and its solution, you know how to react. You do not need to be emotional about it. And emotions in investing are generally a bad thing.
I did not invent the concept! It is a well-known thing. It was at first used between a portfolio manager and the client. This statement was helping the manager invest in the way the client wanted. Since I am my portfolio manager, I am making this statement only between me and me.
I was motivated to write my IPS after reading this post by Mr. Retire In Progress. He was himself inspired by another post by Physician On Fire. I would also recommend you read these two posts if you want more information on the subject.
You will find my Investor Policy Statement below if you want an example. Remember that every IPS is different and should be made for your situation and goals. You should not copy another IPS. However, you can get some inspiration from others’ IPS. So let’s delve into my IPS.
My Investor Policy Statement
- Reach Financial Independence before the age of 50 (2038)
- Taking into account children
- Taking into account the possible purchase of a house
- Save at least 50% of income every single year
- Always consider upkeep costs of every purchase
- Always compare to make sure things are kept cheap
- Regularly inspect all recurring bills to see if we can save something
- Invest all extra cash at the end of the month
- The savings should be invested directly at the end of each month
- Minimize taxes
- Every year, max out contributions to the third pillar
- If possible and if interesting, contribute buy-ins to the second pillar
- Emergency Handling
- We should keep about one month of income in cash each month
- This cash should be used for emergencies before the next income arrives
- If necessary, we can use credit cards to cover more expensive emergencies
- Each month
- Review all assets
- Update budget dashboards
- Make sure everything is going according to plan
- Adapt for next month if necessary
- Invest mainly in stocks (>80%), then in bonds (<20%)
- As a possible alternative, consider real estate investing
- As a possible alternative, consider peer-to-peer lending
- Buy and hold
- Never try to time the market
- Only sell when money is necessary
- Only invest through indexes
- Do not buy individual stocks
- Use ETFs
- Minimize fees
- Only use no-load ETFs/Funds
- Minimize transactions costs
- We should choose ETF with TER below 0.25%
- Investments should cover the entire world
- We should use some home bias for the Swiss stock market (20%)
- Avoid sector bias
- Be open to 10% more open investment (fun money)
- In an investment portfolio, not in a retirement portfolio
- The fees should still be kept low
- Do not do Dollar Cost Averaging (DCA)
- It is not efficient
- It is betting that the market will go down
- Invest every month
- Use investing to rebalance
- Minimize the number of monthly investments to lower the costs—ideally, only one per month.
- In case of significant planned expenses (such as a car or a house), forego investing.
- In case of large unexpected windfall (>10’000 CHF)
- No hasty decisions
- Be aware of taxes (only consider the after-tax number)
- Only use up to 20%, guilt-free
- Invest what remains towards the goal
- Do not increase our lifestyle! Consider maintenance costs.
- Bonus and ESPP are not a windfall, but regular income
- In case of very large unexpected windfall (>100’000 CHF)
- Same as for smaller windfall
- Only use up to 10%, guilt-free
- Every year (beginning of the year)
- Review this document
- Major rebalance if necessary
- 90% Stocks
- In a broker account and the third pillar
- 80% International Stocks
- 20% Domestic Stocks
- 10% Bonds
- In the second pillar only
- While working, keep at least two months of expenses in cash
- While not working, keep at least six months of expenses in cash
- Money > FI should not be invested 100% in stocks
- Withdraw first pillars in several years
- Delay social security, if possible
- We should use dividends in priority
- Sell only when necessary
- Minimize fees
- We should review the Investor Policy Statement in-depth when:
- Having children
- Buying a house
- Large windfall
- Large revenue increase
An Investor Policy Statement can help remove the emotion out of investing decisions. It is very important if you want to avoid investing mistakes. It can be a great exercise to know more about your goals and strategy. It is great to have these things in writing.
Writing my IPS was a great exercise for me. It took me a pretty long time to make it well enough for me. It helps thinking of situations I did not think about before. With my IPS, I can rely on it when I need to make an investment decision. This statement will help me decide without emotion.
For instance, this would have helped me with my portfolio instead of updating it first with more bonds and then again with smaller bond allocation. Now my portfolio is in tune with my IPS. I recommend you do the same exercise and write an IPS.
As I said, your Investor Policy Statement is not set in stone. I will check my IPS each year. If my goals are changing, for instance. Or if I think my strategy is not adapted to the situation anymore. But do not change your IPS to explain a decision! I will update this page when I make changes to my IPS.
What do you think of my IPS? Do you have one?