Successful investors know when to buy, how long to hold, and when to sell. They know when to pass, when to kick, and when to fake. They know whether they should use the shotgun, or if a nickel defense is their best bet. How is investing like NFL football? The coaches have a playbook, they know how to read signs, and they know the odds. The difference between a rookie and a veteran is that success is based on cold, hard planning. As exciting and terrifying as investing can be, veteran investors remove themselves from emotional play-making and follow the rules they’ve made to play their game.

Just as you would never build a house without a set of blueprints, you should also not invest until you and your financial advisor have developed an Investment Policy Statement (IPS). With an IPS, you are completely clear about your investment goals, the constraints you are likely to face, and the impact these constraints may have on your portfolio so you can achieve your required rate of return (RRR).
Your Investment Policy Statement contains your investment philosophy which guides you with crafting your investment goals. For example, you may decide to invest only in companies that help people, or because of your professional background in technology you may choose to only invest in companies developing new technologies because this is an area you know well. On the other hand, because of your unique situation, you might decide to only invest in tax-deferred or nontaxable investments. Then again, you might decide you’re an aggressive investor and want to have a portfolio that accelerates your gains.
Your IPS identifies your required rate of return (RRR), which is the amount of return you need to earn annually on your investments to meet your financial goals. Because everyone’s financial circumstances are unique, the RRR can vary from person-to-person. One person may require an RRR of 5.7% for the next 20 years while another person might require an RRR of 7.8% for the next 10 years. If you are uncertain what your RRR is, you should consult with a financial advisor who will help you determine the dollar value of your financial objectives and how to make intelligent investments that help you achieve your goals.
Another key feature of your IPS is knowing the investment risk you’re willing and able to accept. Every investment carries a risk, even holding cash. No one likes to see the value of their portfolio decrease, and yet it happens every day. Knowing your appetite for risk is essential for building your portfolio. Your financial planner can analyze risk and help you diversify your vulnerability among the assets you select, maximizing your portfolio’s rate of return while minimizing your exposure to risk. Part of establishing your risk profile is understanding if you are a conservative, moderate, or an aggressive investor. There are, of course, variations for each of these three levels.
Still another key feature of your Investment Policy Statement is acknowledging the constraints particular to your situation. You may have a time constraint that limits the potential for growth. For example, if you are over 50 years old, the time remaining before you’ll need your funds is less than those of a 20-year-old just starting out. On the other hand, an investor of 50 is probably a larger income producer than a 20-something, so it’s possible more funds can be allocated for investments. Taxes can also be a constraint and a potential investment must be analyzed to determine if the best option is taxable or tax-free, income producing or growth through appreciation, etc. Also, portfolio turnover can accelerate taxes in a taxable account, and capital gains taxes can harm your portfolio’s investment performance. These are some examples of how your risk profile should be determined so you can retain as much of your investments’ proceeds as possible.
Your Investment Policy Statement is essential as a successful investor. It’s the playbook that helps you make investments in a rational and organized manner, without the chaos induced by the emotions of fear and greed. Your IPS helps identify good investments so your collection of investments increases the possibility of gain while also increasing your defense against risk.
Think of your portfolio as a Super Bowl team: you have players who are expert at offense, and players who are expert at defense. You and your financial planner are the quarterback signaling the right play at the right time to score touchdowns and win the Lombardi Trophy for a game-winning comfortable retirement lifestyle!
If you’re interested in creating or discussing your Investment Policy Statement and making sure it correctly details your investment strategy for optimal returns and risk protection particular to your circumstances, please contact us so you can develop and follow a plan of action which brings you closer to your financial goals.
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