By Dr. James M. Dahle, WCI Founder
[This post was originally published in 2015, but it was fun to go back and review for republication now in April 2020. Note that my current asset allocation is slightly different from what is in this post as it was changed in 2017. I feel even more strongly now about having a written investing plan (investing policy statement) than I did in 2015. If you need help getting one in place, there are three ways to do it. And yes, most of you apparently still need to do it based on my recent Twitter poll.]
I once shared my Investment Policy Statement (IPS) on the Bogleheads forum. Apparently, most people had never seen such a thing. They thought it was so unusual it was stuck into the wiki. It wasn't actually the entire statement, but it was the portion I was willing to share. You see, an IPS is a rather personal document as it not only dictates your financial plan, but also reveals your values, which are often very different from those of other people.
I went looking for my IPS for this post and noted it hasn't been modified since July 29, 2007. That's pretty beneficial, as it obviously got me through the 2008-2009 bear market, but also ensured I captured all the upside coming out and am well on track (actually far ahead of “the track”) to reach my goals. It's probably time we revised it actually. At any rate, I'll share a few pieces out of mine and talk about what you ought to consider including in yours. The most important thing, however, isn't mine, it's yours.
Why Should You Have an Investment Personal Statement?
To decide upon your financial goals and make a plan for:
- Investment selection
- Asset allocation
- Emergency funding
- Debt
- Spending
- Giving
- Staying committed to reaching your goals
Let's dig into each of these areas.
How to Write an Investment Personal Statement
Section #1 Setting Your Financial Goals
Any investing plan ought to start with setting goals. Realize that these will likely change, and that's perfectly okay. They might not change as much as you think, but most importantly, any plan is better than no plan. Goals should be specific, attainable, and valuable to you. Here are the goals from my 2007 statement (1 year out of residency):
- Our investments will provide an income of $100,000/year (2006 dollars) while still growing at the inflation rate providing us financial independence by June 28, 2030.
- We will be worth $1 million dollars by June 28, 2017.
- Save at least 20% of our income every year beginning in 2007.
- Save at least $30,000 (2006 dollars) per year while in the Air Force.
- Save at least $53,000 (2006 dollars) per year after finishing with the Air Force.
- We will always max out the tax-sheltered retirement vehicles available to us.
What's good about those goals? They are both time and real (inflation-adjusted) dollar amount specific. They are attainable. In fact, we've crushed all of these goals and informally set some new ones. They are also valuable to us. I would suggest setting specific amounts you wish to have for your kids' college (and when), retirement, and any other meaningful financial goals such as paying off student loans, getting to a net worth of $0, saving up a certain amount for a down payment, or paying off a mortgage early.
Section #2 Investment Section
In this section, we listed how we planned to invest. Remember this 2007 edition wasn't the first edition, and when this IPS was initially written, we had a five-figure net worth. So this really gives you a glimpse into our plan from the very beginning. At any rate, here's what we put into it at the beginning.
- We will strive to minimize the effects of taxes and expenses on our investment returns.
- Our primary investment vehicles will be stock mutual funds and bond mutual funds, preferably within tax-sheltered accounts.
- We will also consider the use of individual property investment real estate to meet our goals if careful analysis indicates a reasonable opportunity for profit.
- In general, we will favor passively managed investments over actively managed investments.
- We will calculate our savings rate and our total return and real return each year.
- We will strive to achieve a real return of at least 6% per year, averaged over our investment lifetime.
- We will not panic and sell securities due to market corrections.
This is a great place to put any reminders you may wish to have when you look back at this during a market correction to remind you of what your plan was and why. Probably would have been a great place to have included something about rebalancing.
Section #3 Define your Personal Asset Allocation
This is an important section to include, as this dictates what you will be investing in on a month to month basis. Here's how ours read in 2007:
- Our overall asset allocation will be 75% equity investments and 25% fixed-income investments. Investment real estate and our home will not be calculated into this figure. Our emergency fund will be calculated as part of the fixed income. The ratio will decrease gradually to at least 60/40 by retirement.
- Our primary asset classes will be domestic stock mutual funds, international stock mutual funds, and US Government bond mutual funds. Other investments to provide diversification may be used. However, at least 1/3 of our equity will remain in non-US investments.
- We will tilt the portfolio toward mid-cap and small-cap stocks in an effort to increase returns so long as reasonably priced investments are available, both domestically and internationally.
- We will tilt the portfolio slightly toward value stocks, both domestically and internationally. This will be maintained by the purchase of specific value stock mutual funds if necessary and so long as reasonably priced investments are available.
- We will rebalance our asset allocation as frequently as necessary using the 5/25 rule using new investment money as much as possible. If selling in a taxable account (or selling an investment with significant trading costs) is required to rebalance, this may be performed no more than once per year.
- Our fixed income allocation will include our emergency fund with the remainder in tax-sheltered accounts split 50/50 between nominal bonds and inflation-indexed bonds. We will use the G fund as much as possible.
- Our equity allocation will include domestic, international, and emerging market stocks and large-cap, mid-cap, and small/micro-cap stocks. We will also allocate a percentage to REITs and other alternative asset classes if they promise diversification benefits and solid long-term returns. For the most part, these will be broad total market index funds, but they may be supplemented by small amounts of value index funds as needed to maintain a slight value tilt.
- No asset class will represent more than 30% or less than 5% of our portfolio.
At this point, we listed the actual asset allocation. As you might imagine for a military doc, we had a pretty good chunk of our investments in the Thrift Savings Plan (the federal 401(k).) We have had minimal changes since then, which long-term readers should be aware of (addition of a 5% slice of P2P Loans, and a 5% slice of small international.)
Asset Allocation Example
- Equity (75%)
- Total Stock Market/C Fund 17.5%
- Extended Market/S Fund 10%
- Microcaps 5%
- Large Value 5%
- Small Value 5%
- REITs 7.5%
- Developed Markets/I Fund 20%
- Emerging Markets 5%
- Fixed (25%)
- Nominal Bonds (12.5%)
- G Fund 12.5%
- SDP as needed
- Inflation-indexed Bonds (12.5%)
- TIPs Fund 12.5%
Your specific investing plan doesn't matter all that much. Perfection is impossible. You just want a reasonable portfolio such as these. But writing it down will force you to make sure you have a plan, and will help you to follow it.
Section #4 Emergency Fund
An emergency fund is such a key part of a financial plan that it deserves its own section. We've since expanded ours to 6 months and keep it in a high-yield online savings account. Probably ought to update this thing.
- We will maintain an emergency fund equal to at least 3 months of expenses, but 6 months when combined with directed savings (auto, home, etc) (minus taxes and designated savings) in guaranteed investments such as money market funds, short-term bonds, or CDs. We will count this as part of our fixed allocation.
Section #5 Home Ownership, Student Loans, and Paying off Debt
Anything related to paying off debt goes in this section. Since our only debt was our home it was simple.
- We will strive to own our home whenever possible.
- We will not spend more than 20% of our income on mortgage payments and property taxes.
- We will carefully research both our home purchases and our mortgage options to ensure we obtain the least expensive options available to us.
- We will use home equity loans only to improve the home, consolidate other loans, or to invest in guaranteed investments such as money market accounts or government bonds.
- The mortgage on the home we are living in will be paid off at the time of retirement.
My “why”.
Nothing too complicated there. You should add a section about paying off any student loan or consumer debt if you have any. The only student loan I had in 2007 was fully subsidized and didn't require payments. Plus it was only $5K, so we didn't include it. But most young docs should have a plan to pay off their educational debt in 2-5 years, get rid of any consumer debt, and have a plan for what role debt/leverage will play in their financial plan.
Section #6 Spending and Giving
This section more than anything else will reveal what you value. But I think it is important to include this section because it helps you to remember WHY you're saving and investing now — you're saving now so you can spend MORE later. Here is part of ours:
- We will track our spending at regular intervals to ensure appropriate use of our resources.
- We will not use credit to purchase automobiles, appliances, or vacations.
- We will use credit only for convenience, mortgages, and safe, fixed-income investments.
This is a great place to discuss charities you wish to support during life or even after your death. You can talk about any inheritances you wish to leave as well. Want to drive a luxury car? It goes here. Want to see a new country every year? It goes here also.
Section #7 Changes (and Signatures)
It's important to consider future changes to this plan. We've obviously had some, although they are pretty minimal. Here's what our plan was:
Any change to these percentages or change in funds used will require a 3 month waiting period. Development of any new asset class or new funds allowing us to invest in an asset class such as international small or international value stocks will require a 3 month waiting period prior to transferring funds.
If you don't have a written investment policy statement, please sit down with your partner this month and formulate one. It doesn't have to be this long, or this complicated. And it certainly doesn't have to be final. But if you make a plan to reach your goals, you will be far more likely to actually do so. If you don't want to write the plan yourself, take our Fire Your Financial Advisor course or hire a good financial planner who offers good advice at a fair price.
What do you think? Do you have a written investing plan? What does yours say? Did this post convince you to write one? Why or why not? Comment below!
That’s a good statement. Shortly after I fully retired, I wrote a comparable statement, though my approach was somewhat different. Having a bit of understanding of economics, I began with the investing environment, as I saw it, to give more context to my own choices. Then I started with my goals and values, much like yours. From there I proceeded to get more and more specific on what investment approach(es) I would employ to achieve these goals. I review it about once a year, to update as needed my observations on the environment and my goals, and any others suggested by those changes. However, over several years, I have made no major changes, and relatively few minor ones. I strongly agree with you on the need for one — it clarifies things and keeps you on track, if you reread it occasionally.
Great timing on this post. I’m sitting in a waiting room listening to the cable news talking heads report on a “historic” drop in the stock market this morning. I’m sticking with the same investment plan I had last month, last year, and beyond. Hope everyone else following this blog has internalized your advice over the last few years and manages not to panic.
You had your head screwed on right from an early date. It’s good to see how you have executed your plan and then some.
The line about “We will not panic and sell securities due to market corrections” is especially relevant today and in coming weeks.
One query: You mentioned 20% of income for PITI (assuming last I in there, too) on the house. Is that 20% of gross income? Net income before retirement accounts? Take home pay including all tax-deferred and pre-tax deductions?
20% of gross. We’re spending closer to 5% these days of course, and it’s been less than 10% for quite a while. That’s the benefit of a great income and not being in Manhattan or San Fran.
Amazing that you were able to write out such a plan at such a young age and stick to it. For young WCI readers I want to reiterate that a market correction like we are in now will really test your ability to follow your plan and to not panic. Consider this a buying opportunity for the long term if you have some unallocated cash. I always try to not check my account balances at such times. I simply follow the news so I have a general idea as to what is going on.
I really like the 3 month waiting period. It allows for necessary flexibility as you learn and grow while preventing stupid impulse decisions. Think I’ll be stealing that for our own policy which otherwise is pretty similar.
I still find it amazing that the simple act of writing down goals has upon achieving them. Nice job of blowing your written goals out of the water!
“Our investments will provide an income of $100,000/year (2006 dollars) while still growing at the inflation rate providing us financial independence by June 28, 2030.”
So how much is that?
2.5% inflation turns 100,000 into 124,886 by 2015. With a 4% withdrawal rate, you would need $3.12 million in today’s dollars. At his current rate, I would suspect he would hit his mark sometime around 2022. *Back of the napkin math*
That data is still unknown. Take $2.5 M and multiply it by the change in the CPI from 2006 to 2030.
Thank you for writing this post. You have alluded to your IPS several times in previous posts but it wasn’t ever clear how to actually do it without being referred over to Bogleheads…where I no longer venture. Thank you and congratulations. Now we have a family goal to begin 2016.
“You might also add a section about student loans if you have any.” Bwahahaha.
Agree with the post but I would take this one step further… All of this is under the Financial section. Consider adding ALL other sections of life as well with listing out important goals short and long term in each section.
Financial
Intellectual
Social
Spiritual
Occupational/business
Marital/family
Physical/ personal and home issues
I will routinely email this to my wife as weekly or monthly reminders regarding aforementioned goals, to do list for each of us, celebrating accomplishments, and considering new ideas. A combination of the 7 spokes of life with a GEMBA board.
For my wife and myself …. This has provided focus and direction Especially as a dual physician couple with 3 kids.
Obviously it’s your statement and you can do what you want with it. I write down other goals elsewhere. My IPS is essentially 100% financial (as you can see.)
Thanks for this post! This was so timely as I (and my wife) are currently working on our IPS. Some of your old posts and IPS on Bogleheads is bookmarked for reference!
WCI,
I made the typical mistake of upgrading my 11 year old truck basically as soon as I graduated and bought a practice. However, the loan is at 1.98% interest. What are the financial benefits/upsides of paying a loan with that low of a rate off and/or not using that kinda rate to not buy the next vehicle with cash? Is it just a state of mind thing or “buying what you can afford” kinda thing?
That’s my main issue with it. Hopefully your investment portfolio can outperform a 1.98% loan. That and the slippery slope argument- i.e. a 4% loan isn’t much worse than a 2% loan, a 6% loan isn’t much worse than a 4% loan, and before long, you’ve got a credit card at 29%.
The only thing I would add would be a section on insurance needs and funding this expense. Specifically, the biggest variable is providing for long term care. Annuity strategies could also be added: Avoid? Purchase? What type? When to purchase? And life insurance for family solvency in case of a loss of a wage provider: Whole Life? Universal? Term? This could be a separate category or possibly included in the goal section. Personally I would have a separate category for this subject. Your thoughts?
Yes, you could add all that in. But for most docs, insurance can be very, very simple. As you’re in residency and moving out of it, you buy a big fat disability policy, a big fat term insurance policy, and a big fat umbrella policy. You self-insure long-term care and pretty much everything else.
I agree a withdrawal strategy ought to be added to the plan at some point, whether using a SPIA, a pension, or a systematic withdrawal plan or all of the above. Probably okay not to have it in there when you initially draw it up.
Here is another example just to give people some ideas:
Investment policy statement and personal finance philosophy.
The purpose of investing is to preserve capital and to produce a reasonable return on investment.
The asset allocation should include at least 3-5 loosely or non-correlated assets, two of which will be bonds and stocks. Bonds produce stability and stocks produce growth over a long timeframe. Real estate, commodities, and private placements are good options as well.
80-90% must be passive investments such as index mutual funds.
Costs must be minimized. This includes fund expenses, trading fees, taxes, etc.
10% or less can be actively managed as a separate brokerage account. This can be in more speculative investments. This helps me have a forum to express and test my investment ideas without putting the bulk of funds in jeopardy. This trading account must beat the S&P500 index, otherwise it too should be passively managed.
Investments should be for long-term with an expected time horizon of at least 3-5 years.
I will invest a minimum of 15% of gross income per year (ideally 20%) into long term investments.
We will maximize IRA annual contributions and roll them into Roth IRAs annually.
We will not go into debt for consumer items or depreciating assets or even for housing. Remember that a house is not an investment and is a liability.
We will maintain an emergency fund covering at least 6 months (preferably 9-18 months) in cash or a money market account. For example $6k per month x 6 months would be $36k minimum balance. This will provide peace of mind and will also prevent us from needing to pilfer from our retirement funds in case of an emergency.
We will continue to invest at least $5k per year per child for 529 college savings.
We will pay off credit card bills each and every month in their entirety.
We will continue all disability and life insurance policies.
The asset allocation for equities will run between 25% and 75%, averaging 50% (40-60%) depending on market levels/fundamentals and investor sentiment. A contrarian asset allocation is preferred; for example lower stock allocation when the market is high and investing in stocks is a popular, enticing, easy, glamorous thing to do. This will be achieved not through an attempt at prediction or market timing but rather through periodic re-balancing. All accounts will be reviewed quarterly. Re-balancing will occur at least once per year. The cutoff will be the 5/25% rule. The asset allocations are changed only if they are off the target by either 5% from target (absolute) or 25% from target (relative).
Fixed Equity
Bonds 40
Equity US Large 10
Equity US Lg Value 10
Equity US Small 10
Equity US Sm Value 10
Equity International Intl 5
Equity International Intl Value 5
Equity International Intl Small 5
Equity International Emerging 5
TOTAL 40 60
Real Estate Separate
Private Investments Separate
Health Savings Separate
College 529 Separate
Checking Separate
Primary Residence Separate
Our preferred use for disposable income (other than investing) is to obtain education, travel, and uniquely memorable experiences. Money spent on consumer items or status seeking is largely squandered.
The purpose of the investment accounts is to provide a measure of financial freedom and financial independence. It also allows for financial integrity. Complete retirement will never be the goal but an unexpected forced early retirement should not be financially devastating.
Thanks for sharing. The more examples the better.
Don’t know if this will be helpful but I’ll link to an IPS template that we use with our investment management clients. Feel free to use the structure or wording.
http://pathwise.co/wp-content/uploads/2015/08/Sample-IPS-Statement.pdf
Thanks for sharing. That’s a good example of how an IPS for an advised investor is a little different from that of a DIY investor, since it requires both parties to come to an agreement.
I know this is an old post but I went back and read your IPS again recently for motivation to write ours. Has it changed at all recently esp with success of blog? More importantly, for those with high marginal tax rate (doesn’t sound like you’ll ever get there) how would you change the bond allocation? From my take on your posts on this and comments on Bogleheads, sounds like high income high marginal tax (I.e This in HCOL areas) should put bonds in a taxable account and not necessarily tax sheltered.
My IPS hasn’t changed with the success of the blog, although my tax rate certainly has. I fully expect to be in the top bracket this year and probably going forward despite every deduction I can think of.
The asset location decision is complicated. For many people, bonds in taxable is right. If a high earner is going bonds in taxable, then it makes sense to use muni bonds. I don’t have much of a taxable account, and none of it, at least right now, is earmarked for retirement. So it’s not an issue I face with my personal retirement investing plan.
Hey WCI, I know this is an old post but what percentage of your portfolio is outside of Tax protected retirement accounts?
I’m starting to develop a decent taxable account again. I think we might be up to 15% of portfolio. Haven’t calculated lately but most savings is headed there these days, for better or for worse.
“Our overall asset allocation will be 75% equity investments and 25% fixed-income investments. Investment real estate and our home will not be calculated into this figure. Our emergency fund will be calculated as part of the fixed income. The ratio will decrease gradually to at least 60/40 by retirement.”
I understand your home(if not originally purchased as an investment vehicle) but why is “investment real estate” not included in your portfolio allocation plan? I’m having hard time understanding that. Does that also include investments in more passive RE vehicles like the 37th parallel fund or just hard assets like a rental property?
Nice find and great question.
The easy answer is that it is now and apparently I need to update the IPS on that point.
The reason it was there before was that I chose to leave it out because it is so hard to value and rebalance it when you are a direct real estate investor. But I’m all in private funds and syndications now which is easier to value and rebalance.
Do you plan as designating private RE funds and sydications as equity or as its own separate group?
Thank you!
I include them in my real estate allocation (20% of portfolio) currently.
Great classic post Jim and awesome to travel back in time to see how your IPS has not changed really after all these years. After taking your FYFA course, basically it looks like an IPS is the main meat of a written financial plan, correct? But did you run into problems following an IPS without the guidance of a full financial plan? For example, an IPS doesn’t include kids education, an actual budget, and insurance cost, which could affect any dollar amounts in an IPS. Do you think one can follow just an IPS without the full financial plan taught in your FYFA course?
You can do whatever you want, but the more that is included in your written plan the easier it will be to follow it.
I read your original post in 2015 and left a comment (seen above). It is a bit discouraging to see that 5 years later less than 1/3 of your readers responded YES to having an IPS.
If you are a doctor reading this and you don’t have a simple written financial plan or written investment policy, start one today. It doesn’t have to be complex or detailed. It just needs to exist in writing. Especially for the DIY folks like me or WCI.
But even if you have a financial advisor you need a plan. That is part of their job. And you should understand the plan and be on the same page.
My plan is one of the most important documents I own. I wish the same for all readers soon. Let’s hope for a better response when this is run again in 2025!
Alright, alright, I finally put ours in writing (rather than a few entries in the spread sheet). Emailed it to spouse- he’ll probably balk at “3 months contemplation for major purchases”. (I figure he got the sailboat; until I have a horse farm or something we don’t need to deplete our money for the new Corvette.)
My major innovation (I cribbed off WCI’s old one) is
Disinvestment goals:
Rather than draw a certain amount from our “retirement” savings each year we will (when we start) draw a certain PERCENT of our savings, to be calculated with an eye to savings being adequate to get us into our 90s using that percentage but with no need to leave any inheritance. This amount will be reassessed every 3-5 years.
Consideration of RMDs and social security benefits starting in our 70s will be included.
If we are spending so little we will not likely exhaust our savings we shall consider increasing our spending, to include charitable donations or gifts, but these must be approved by both parties and any purchase or commitment over $10K (ie corvette or funding a grandkid’s education) shall require 3 month cooling off period for contemplation and consideration.
Thank you for writing this post. As You Mentioned The IPS Published In the Bogleheads Forum Was Only A Portion Of It But Here The Details Given Relating To IPS Is Really Detailed And Informative And Was Really Helpful For Me And I Want To Ask You Like What Took You So Long To Publish The Article As You Have Already Published A Portion Of It In Bogleheads 5 Years Ago.
This is republished this week. It was originally published 5 years ago in August 2015.
Something that bears mentioning is just how an important a relationship/communication tool a document like this is for those of us who are investing with a partner. My wife and I are in this process right now and you would not believe what kinds of things come up! I think most of us can safely plan for at least a full evening just on section 6…
Thank you for sharing your wisdom and your journey with us.
Excellent point.
Hi!
I’m a long time reader, first time poster. My husband and I are currently taking the WCI Fire your Financial Advisor Course. We’re starting to work on writing our financial plan and I’m looking for some suggestions on how to handle our situation. I’m the ‘doc’ in the family, a peds dentist with a steady income right about the average for my specialty, but not a practice owner and no immediate plans to own. My husband has an entrepreneurial spirit and runs a start up that is just starting to become profitable. He’d like us to write our financial plan based on his projections for his company growth. Although I have full faith in his ability to succeed, I feel its prudent to write the plan based on our current earnings and adjust accordingly as his company grows. Does anyone have any suggestions for how we can reconcile these two points of views? Is there a way for us to write the plan that we take into account both considerations?
Thank you!!
Great question. I lean more toward your side of the argument (i.e. don’t count your chickens before they hatch), but I don’t see why you couldn’t write a plan that says “If the business succeeds as we hope, we’ll do this. If it doesn’t succeed as we hope, we”ll do that.” Does that make sense?
Definitely makes sense! Thanks a bunch!