My Investor Policy Statement – You need one too!

Posted on Categories ETF, FIRE, Goals, Investment
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It’s been a long time now since I wanted to write my Investor Policy Statement (IPS). I just took some time over the last week to write it down completely.

So, what’s an IPS ? Basically, it’s 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.

Why would you need an IPS ? The reason is to keep you on the right path when a situation trigger. If you already though of the problem and the solution to it, you know how to react. You don’t need to be emotional about it. And emotions in investing are generally a bad thing.

I didn’t invent the concept! It’s an old thing. It was at first used between a portfolio manager and the client. This was helping the manager invest in the way the client wanted. Since I’m my portfolio manager, I’m doing this statement only between me and me. I was motivated to write my IPS after I read this post by Mr. Retire In Progress. He was himself motivated by another post by Physician On Fire. I would also recommend you read these two posts if you want more information on the subject.

If you want an example, you’ll find my Investor Policy Statement just below. Keep in mind that every IPS is different and should be made for your own situation and goals. So let’s delve into my own IPS.

The Poor Swiss Investor Policy Statement

Objectives

  • Reach FI before age 50 (2038)
    • Taking into account children
    • Taking into account possible house

Strategy

  • Save at least 50% of income
  • Invest all extra cash at the end of the month
  • Minimize taxes
    • Every year, max out contributions to third pillar
    • If possible, contribute buy-ins to second pillar

Investment Philosophy

  • Invest mainly in stocks (>75%), then in bonds (<20%)
    1. Consider real estate investing
    2. 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
    • ETF should be chosen with TER below 0.3%
  • Diversify
  • Avoid sector bias
  • Be open to 5%-10% more open investment (fun money)
    • In investment portfolio, not retirement portfolio
    • Could be individual stocks
    • Could be a different kind of fund
    • Still keep the fees low!
  • Do not do Dollar Cost Averaging (DCA)
  • Invest every month
    • Use investing to rebalance
    • Minimize number of monthly investments, to lower the costs. Ideally only one per month
    • In case of large planned expenses (car), forego investing
  • In case of large unexpected windfall (>10’000 CHF)
    • No hasty decisions
    • Be aware of taxes (only consider the after tax number)
    • Use up to 20%, guilt-free
    • Invest what remains, towards the goal
    • Don’t increase lifestyle
    • 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

Asset allocation

  • 90% Stocks
    • 80% International Stocks
    • 20% Domestic stocks
  • 10% Bonds
    • In second pillar
    • In third pillar
  • Cash
    • While working, keep at least 2 months of expenses in cash
    • While not working, keep at least 12 months of expenses in cash
  • Money > FI should not be invested in stocks

Drawdown plan

  • Withdraw first pillars in several years
  • Delay social security, if possible
  • Dividends should be used in priority
  • Sell only when necessary
    • Minimize fees

Review events

  • The Investor Policy Statement should be reviewed in-depth when:
    • Marriage
    • Children
    • Buying a house
    • Large windfall
    • Large revenue increase

Summary

Here you have it: My Investor Policy Statement!

This was a great exercise for me. It helps thinking of situations I didn’t think before. Now that I’ve got my IPS, I can rely on it when I need to take an investment decision.  This will help me take decision without emotion. For instance, this would have helped me with my portfolio. Instead of updating it first with more bonds and then updating it again with less bonds. Now my portfolio is in tune with my IPS. I really recommend you to do the same exercise and write an IPS.

As I said, your IPS is not set in stone. I will check my IPS every beginning of a new 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 just to explain a decision! I will update this page when I do changes to my IPS.

What do you think of my IPS ? Do you have one ?

6 thoughts on “My Investor Policy Statement – You need one too!”

  1. Very Smart! Always good to have a plan and stick with it. I haven’t done a full IPS myself but I’d thought of making my goals public like you as an outline for my plan plus it incentives me to stick with it.

  2. Very interesting, thanks for the transparency.

    Could you please explain your rationale behind the following 3 statements?

    1) Do not do Dollar Cost Averaging (DCA)

    2) Max out contributions to third pillar

    3) Money > FI should not be invested in stocks

    Thanks and keep up the good work. You have already motivated me to open an account with Degiro and invest in low cost Vanguard ETFs.

    1. Hi Sirob :)

      Thanks :)

      1) DCA consists in not investing lump sum, but spreading the investment in several smaller investment. DCA is a bet that the market will go down. In any given years, there is only a 23% of this happening. You can have a look at this post for more explanation: http://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
      2) You can deduct your third pillar contributions from your taxes. You can read my article about the third pillar for more information.
      3) The idea is that once I reach FI independence, I want to reduce risk on my extra money. Since I may stop working at this point, I will need the money so less risk is better. I was thinking to invest this extra part solely into bonds.

      I’m glad you found out the motivation to start investing :)

      Don’t hesitate if you have more questions.

      1. Thanks for the clarifications and the link. It’s very interesting. Time for me to sit down this weekend and compose my own IPS!

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