Being a successful investor is not an easy accomplishment, requiring knowledge, experience, and the wisdom to know when to enter a trade, how the trade will affect the rest of your portfolio, and when to exit. This is simplistic, of course, but one sign of a successful investor is having a plan of what to do and when. Plans that achieve the best results have an underlying structure. We call this the Investment Policy Statement.

Imagine yourself building a house without a set of blueprints. On a section of barren land you would dig a foundation for a house whose square footage you didn’t know, pour concrete and set studs for the wooden framework you haven’t designed, add walls with windows and doors … all according to a mental plan in your head. Can it be done? Yes, but can it be done well? Would results be more compatible if you had first created blueprints?
Similarly, investing your financial resources can be greatly expedited and more secure once you’ve developed your investment policy statement (IPS). The main purpose of your IPS is to help serve your financial analysis process with a specific set of rules that guide your decision-making. Here are the components of a good investment policy statement:
1. Identify the person responsible for creating the investment policy, executing the policy, monitoring the policy’s results, and making changes as necessary. This could be you or your financial advisor.
2. Describe your investment philosophy. You may choose to invest conservatively, moderately, aggressively, or some combination based on a weighting of asset allocation. Your investment philosophy guides you with identifying your current situation, determining your goals, and measuring the gap between. This is sometimes referred to as a “GAP” analysis.
3. State your investment objective as a monetary sum. Most investors want to acquire as much as they can, but this does not lead to a carefully organized and measured plan of growth. It’s much better to know at the outset the amount of money you need so you can structure the steady advance of your investments toward an achievable goal. Most investors want sufficient wealth for a comfortable retirement lifestyle. If you’re not certain what your retirement lifestyle will be, now is a good time to consult with an advisor to figure this out.
4. State your return objective. Your return objective is the amount of return you must earn annually on your investment to achieve your investment goal. Known as the required rate of return (RRR), this return rate is different for everyone. You might need to earn 5% to achieve your investment goal over a 20-year period, or you might need 9% over the 20 years. Consulting with your financial planner should provide you with a rate of return that is reasonable and protects you from undue risk.
5. State your risk objectives. Every investment carries risk, and knowing how much risk you can accept is an important part of building your portfolio. Your financial advisor can help you diversify your vulnerability among assets that have a likelihood of achieving your return objective.
6. Examine your constraints. The amount of time you have to invest before retiring is an important variable, as are the impact of taxes, inflation, and investment fees on your wealth accumulation. Again, your financial advisor can assist you with identifying constraints and planning for them.
Clearly, having an investment policy statement as the underlying structure and plan of action for selecting, managing, and exiting investments brings structure to the steady acquisition of wealth and serves as a neutral guide for making decisions about your investments, keeping you emotionally impartial during storms so your investment decisions for entry and exit are based on previously approved decision points and not the caprice of fear and greed.
We hope this article about creating an investment policy statement was informative. Synergy Financial Management can assist with developing and managing your IPS so you achieve your financial goals as quickly and safely as possible.
Please contact us so we can discuss ways to increase your personal wealth and enhance your retirement. Thank you!

Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM

Synergy Financial Management, LLC

701 Fifth Avenue Suite 3520

Seattle, Washington 98104

ph: 206.386.5455

fx: 206.386-5452

www.sfmadvisors.com