You need an Investor Policy Statement if you are serious about your investing. In this article, I will lay out exactly what an IPS is, why you need one, and how mine looks like.
What Is an Investor Policy Statement?
An Investor Policy Statement is a document that outlays your investment goals, desired strategies, asset allocations, contingency plans, and concrete plans on how you’ll invest.
This IPS will very likely be a living document, that changes as your life changes. However, it shouldn’t change too often. The reason is simple. You lay out your investment goals and strategies for the long term and they simply shouldn’t change too dramatically too often.
Especially during volatile times in the market cycle, it can be easy to think you have to change your investment strategy, while more likely than not you’re better off keeping your current strategy. Your Investor Policy Statement will help keep you on track.
Why Do You Need One?
As stated above, having an Investor Policy Statement helps keeping your head straight during though times. When the markets correct, and you want to step out or change your investment allocations, it’s too easy to just do that. However, you should always look back to your IPS and then decide what to do.
You IPS will therefore be your safeguard. It will protect you from acting while high on emotions, something us humans are notably bad at.
So if you are serious about investing for the long term, please take an hour of your time to write down your goals, strategies, and other items on your IPS. If you are very serious about it, you might even sign the document as if it were an official contract with yourself (or your spouse of course!)
My Investor Policy Statement
Below you’ll find my Investor Policy Statement. It is the original version that I actually use to make financial decisions. I review this statement when needed, but I don’t change it too often.
You can use the document below as a guideline to create your own IPS, but be aware that this is working in my situation, for my particular finances. This is not financial advice. Do your own research and/or consult a financial advisor before making decisions.
- Be financially independent in 2033 (at age 40).
- Be diversified across both growth and income-generating investments.
- Have enough passive income from income-generating investments and a 3.5% withdrawal rate to cover expenses.
Notes on these financial goals:
I want to be free by 40. It’s not that I necessarily would like to stop working at that age, but I would like to have options. To support my lifestyle, I’m investing in assets with potential for growth (equities) and income generating assets (bonds and real estate). My yearly expenses should be taken care of by the net cash flow from my rental real estate, and a 3.5% withdrawal rate from my stocks and bonds portfolio. If I can manage that, I consider my goal to be achieved.
- Invest in income-generating assets such as real estate.
- Invest in the broad equity and bond markets, preferably through low-cost ETFs.
Notes on my desired strategies:
There are numerous ways to invest. My preferred investments, however, are stocks, bonds, and rental real estate. These should give me a very diversified portfolio with equity in thousands of companies worldwide, and stable cash flowing portfolio of real estate.
Regarding the stocks and bonds, I will make use of broadly diversified, cheap index-tracking ETFs. Regarding the rental real estate, I currently aim for a couple of small flats, to put starters in. However, in the future, that ambition might grow to purchase a smaller apartment complex or even more.
How To Invest and Asset Allocation
- Ideal asset allocation is 50/50 between real estate equity and the stock and bond market.
- For stocks and bonds, I use the rule of age – 10 as the percentage of bonds. When I am financially independent at age 40, my stocks/bonds allocation will be 70/30.
- Ideally, I would like to retire completely or almost debt free, including a paid off primary residence and paid off investment real estate.
- Every year, consider using tax-advantaged retirement accounts. They are not as flexible in The Netherlands, but they might offer better returns. For now (2018) they don’t make sense to me, but this might change. Reconsider every year.
Notes on assets allocation:
When I own a portfolio with 50% in the markets and 50% in cash flowing property, I feel safe. Half of my portfolio then generates me a cash flow that is very steady and keeping up with inflation. The other half of my portfolio is where the magic happens. It is the part that is very likely to outpace inflation and the main source of capital growth.
I would like to retire debt free, but if it makes more sense to keep a mortgage on the investment properties because I can get higher returns that way, I will consider not paying those loans off.
Tax-advantaged accounts are a no-brainer in countries like the USA, however, here in The Netherlands, they aren’t that great. For starters, there is a cap to what you can put in, and it’s not that high. Then, your money is locked up, and it’s almost impossible to get it out before the official retirement age. However, it’s a very nice loophole through the crazy high Dutch taxes. The money you put in (remember: capped) is pre-tax, that alone can save you 52% on the front-end. Then, the money in your retirement accounts isn’t subject to our wealth tax, saving you another 0-1.6% per year!
Do you already have an Investor Policy Statement? If you do, could you let me know in the comments below? I’m very interested in how other people handle this. Also, if you think at least one of your friends would benefit from this article, consider sharing it with them. It’s easy!