Investment: Policy

Personal Investment Policy


There is more to personal investment management than picking the mutual fund that performed best last year and running with it. Establish a personal investment policy and be true to it.

Investment policy is the definition of the procedure of how we intend to accomplish our goal. The goal is the end; the policy is the means to that end. 

Specific investments are not policy. They are merely the tools selected for use as dictated to be appropriate by the policy statements.

We all have financial goals (hopefully). We have investments. Few have considered employing a personal investment policy to help control the investment procedure to reach them. (If your financial planner has ever suggested he could help you obtain your “Goals and Objectives” please drop him like a dead rat – unless he somehow could explain the difference between the two words “goal” and “objective”)

Too many of us invest into whatever we hear is hot on the radio or TV. No focus. We constantly put money on the winning horse of a race that has just been run. Then we wonder why we lose all the time – Simple - our horse is always tired. Is that you too?

Establishing an investment policy is probably the single most important facet of investment management. Setting policy is not just placing good investments. It is deciding exactly what asset classes will be used to achieve our desired results, if and when they should be changed, and why.

Lifestyle is a huge factor here. After all, that is what everyone’s ultimate goal is - to satisfy, maintain or improve their own lifestyle. So I will give you the primary directive: 

Never buy an investment whose failure could negatively impact your lifestyle. This isn’t as simple as it sounds, but if you think about it, it should be at the top of your policy statement list. A loss doesn’t necessarily cause this catastrophe – that is for you to determine, maybe with help but in the end it is up to you.

Ever consider buying a stock or a mutual fund because a friend or relative mentioned how well it did recently? If so, you probably have none, or at best a poor investment policy. When you can be influenced by such chatter, you are financially misguided. Most who boast about their investment successes have had far more failures. Like the Las Vegas gambler, you only hear about the winnings.

Your investment policy is an individually tailored statement designed to be the basis of your strategy for accomplishing things financial. Is there a definite goal or time period? Funding a retirement or a retirement home, college education, or some other expressed purpose? Piling up money is a fine and noble goal in and of itself. If there's no particular reason or time frame that’s all right, but how will you go about it?

What rate of return is necessary? If you only need 5% or 6%, maybe you don’t require stocks or stock mutual funds at all. Do you still want them? Sometimes there is a "desired" rate rather than a "required" rate of return. This is simply a return you’d like, but is not really necessary to reach the goal(s).

Will you use individual stocks or bonds? How about mutual funds? Will you day trade? Will you buy IPOs (Initial Public Offerings of new stock) ETF’s (Electronically traded Funds)? Should you balance holdings between them, or try to time the movements and be completely invested in one or another at any given time? Will you hire a pro? Will you hire an advisor and so some yourself, and which part, why? If you do hire a professional, he must know your policy because it is your money. If you don’t have one, hopefully he will help you to develop one.

Do you plan to be active and move money around and about regularly, or keep the same investments for years? If active, under what circumstances should money be repositioned because that time will surely come. If passive when? You can’t just place it and leave it forever.

Will you move from a stock fund to a different stock fund, or from a stock fund to bonds or a cash position? Why? All funds have bad years. That’s not a very good reason to change. All of the best funds have had less than stellar runs at times. What is the determining factor to trigger movement?

Will you set aside some of the portfolio for timing strategies? Will you try to buy certain sectors like utilities, or banking funds at times that may be opportune? How is "opportune" defined? These issues are important.

What about real estate? Would you like to have a house in an area of the country in which you like to vacation? How about real property as a means to amass greater wealth or income or to reduce business taxes? Would you rather stay away from real estate altogether and concentrate only on more passive investments?

When you set a policy these questions and more should come to mind. Never buy any investment because your sister in law, who has a lot of money (inherited from her eccentric semi-legal union head uncle) thinks it’s a good idea. Her uncle's money came from raiding his union members pension plan - he has no real idea how investing works, she has less.

Invest only when determined through logical thought process that the investment fits into the program. Never rearrange plans to fit an investment.

Finally, after establishing an investment policy, stick to it. It takes considerable thought to come up with an investment strategy and policy and then discipline to maintain it. Don’t abandon it because the wind changes. Investment policy should be firm yet not carved in granite. If an error is made in setting the policy, it should be flexible enough to adjust. 

You made the policy when you were not emotional, you were rational and logical. You are considering changing because something happened that caused emotional distress or euphoria. Repositioning investments is art of the approach, and is not the same as modifying policy. If you decide not to follow your personal investment policy at a later time, you should have a better reason for abandoning it than you had for making it. It is possible it that you made an error and it should be changed, after all we are not perfect – just remember that it was instituted based on logic and reason and is about to be changed likely due to emotion. 

Be careful and thoughtful when making investment policy. Even more so if you consider changing it. 

Next time one of your more braggadocios friends gloats about his recent investment windfall, you will have an easy response. Armed with your well considered investment policy in mind, you can serenely respond that his approach does not fit your well-conceived policy. If it does, don’t tell him and research it yourself. Don’t be afraid to reject it with out a second thought. He probably will have no idea what you are talking about – even better.