My Investor Policy Statement – You Need One Too!
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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 consider each point and adapt it to your 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 invest and why. It should also note 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. You know how to react if you have already thought of the problem and its solution. 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 helps the manager invest in the way the client wants. Since I am my portfolio manager, I am making this statement between myself and myself.
I was motivated to write my IPS after reading this post by Mr. Retire In Progress. He was inspired by another post by Physician On Fire. I would also recommend you read these two posts if you want more information.
You will find my Investor Policy Statement below if you want an example. Remember that every IPS differs 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 we will delve into my IPS.
My Investor Policy Statement
Objectives
- Reach Financial Independence before the age of 50 (2038)
- Taking into account children
- Taking into account the possible purchase of a house
Strategy
- Save at least 50% of income every single year
- Always consider the 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
Investment Philosophy
- Invest mainly in stocks (>85%), then in bonds (<15%)
- 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%
- Diversify
- 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 a 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 toward the goal
- Do not increase our lifestyle! Consider maintenance costs.
- Bonus and ESPP are not a windfall, but regular income
- In case of a huge unexpected windfall (>100’000 CHF)
- Same as for minor 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
- In a broker account and the third pillar
- 80% of International Stocks
- 20% of Domestic Stocks
- 10% Bonds
- In the second pillar, only
- Cash
- 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
Drawdown plan
- Withdraw first pillars in several years
- Delay social security, if possible
- We should use dividends as a priority
- Sell only when necessary
- Minimize fees
Review events
- We should review the Investor Policy Statement in-depth when:
- Having children
- Buying a house
- Large windfall
- Large revenue increase
Conclusion
An Investor Policy Statement can help remove the emotion from investing decisions. It is essential if you want to avoid investing mistakes. Learning more about your goals and strategy can be a great exercise. It is great to have these things in writing.
Writing my IPS was an excellent exercise for me. It took me a long time to make it well enough. It helps thinking of situations I did not know 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 with more bonds and a smaller 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?
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Hello I wish you a nice day
I find this information very valuable, for 3a pillar ajnd taxes relationship I have a huge doubt since I am subject to witholding Tax so I can not low my taxes until I got a citizen status in Switzerland or at least a upgrade residence. Work Permit C. What kind of research should I do to manage my 3a pillar
Hi John,
If you cannot declare the 3a for tax savings, it’s not interesting. In that case, you should simply invest in a broker account or with a robo-advisor until you reach 120’000 CHF of income at which point you will have to do a tax declaration and then you can deduct your 3a.
Hi there,
You are doing a great job with the blog. I am excited to read your posts. They are very genuine.
What happens when you decide to invest and you have already a big amount of cash accumulated (approx. 200K).
Isn’t it safer to do a DCA in this case? I thought of splitting the total amount over 12 or 18 equal shares and invest every month. At the same time if the market goes down 30-40% I will try to buy the dip with all the remaining money at that time.
Thanks,
C. B.
Hi,
Thanks :)
Mathematically, it’s not safer no. Since historically the market has been going up more often than going down, it does not make much sense to DCA in general.
I have an article about DCA.
Obviously, giving the current state of the market, it’s scary to invest at once, so splitting in 12 shares may make sense. And in the end, the difference wont’ be too big.
It also depends on how long term you are investing for.
Hi,
Nice post, one quick question what do you mean by “Money > FI should not be invested in stocks”?
Thanks,
Tomas
Hi Tomas,
It means that once I am Financially Independent, the extra money I get will not be invested in stocks but kept in cash/second pillar/stocks and such.
But I am not entirely sure about that anymore. I would think that once I am FI AND retired, cash will be better. If not retired, cash may not be that interesting.
Thanks for stopping by!
Hello!
Awesome post, although I discovered only now!
I’ve been wanting to do this for myself for a while. But I feel is really complicated. You made it look very easy in this post, but I’m sure you did many hours of thinking.
You need to sort out the asset allocation, choose your broker to have the lowest fees, the investment strategy, and so on. If I add to the equation purchasing a house things are really becoming complicated.
I saw you added purchasing a house as a major event to review the IPS. Any tips strategies for that?
Anyway, just wanted to thank you for writing this post and share links to others for inspiration. I really need to step up my game and write this!
Best,
Marius
Hi TSI,
Thanks :)
It’s not that complicated honestly. But it takes time, that’s true! And it is excellent exercise.
Buying a house means some of your asset allocation will change to Real Estate. And it also means that you need to factor in your mortgage. You need to decide whether you are going to actively amortize the house or not. Things like that :)
Thanks for stopping by!
Nice, I also have an IPS published! Really helpful document for me especially when market behaviour changes and I want to chase the next shiny object.
Well done :)
I think it is very important to be able to tell how to react in important financial situations.
Thanks for stopping by and good luck with your investing!
Hi, I am already retired, 55 years old. I live in Spain. Can you recommend a split among my investments, i.e. bonds vs stocks, US vs rest of the world, and if possible a straight forward recommendation of ETFs that I may contract. thank you
Hi,
I am not a financial advisor, I don’t do pesronal portfolio recommendations.
You can read my articles about this subject:
* The Complete Guide to Asset Allocation
* How to Choose an Index ETF Portfolio?
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.
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.
Thanks for the clarifications and the link. It’s very interesting. Time for me to sit down this weekend and compose my own IPS!
Very good idea!
Hello,
You say you never use DCA but then how and when you invest?
If you invest monthly a fixed percent of your income that looks like a DCA.
It’s not the case?
Hi Bogdan,
This is a very good question. I do not think that is Dollar Cost Averaging (DCA). DCA is when you have a big sum and you buy it in increments. As soon as I have money to invest, I put it in the market. For instance, if I receive a bonus of 10K next year, I will invest directly when possible. I will not wait to average it four times, for instance.
Does that make any sense?
Thanks for stopping by :)
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.
Thanks :)
Yeah, it’s mostly a very good incentive to stick with your own plan :) And a very good exercise to make one in the first place.
Looking forward to read yours ;)