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
- 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 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%
- 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.
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!