July 18, 2024

Why You Need an Investment Policy Statement

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The objective of an investment policy statement would be to turn your investment strategy right into a quantifiable strategy. It could protect you from psychological decisions triggered by anxiety and fear, and may act as your roadmap for potential decisions for what to do with your cash, whatever’s going on in the stock exchange. Here is the way to begin putting one together.

Start with your goals
Before you begin investing–or making modifications to some present investments–jot down a record of your family’s financial objectives. By way of instance, you might have short-term investment goals like saving enough cash for a deposit on a house or paying for a wedding in a couple of decades’ time. A medium-term goal could be covering your kid’s college education.

Try to gauge how much you will need for each objective. The short-term aims could be a lot easier to handle, because inflation will probably be less of a problem. However, you can use an internet calculator to estimate the possible value of your moderate and long-term aims –and you need to expect what is on the list might change as time passes.


Consider your risk tolerance
Be honest: do you check your 401(k) balance each time there’s a swing in the stock market? But when the latest news does not faze you, you could be comfortable with more danger.

Pick your asset allocation
When you have a better sense for your family’s aims, including your own time horizon and risk tolerance, it may be easier to select your ideal mix of investments for every objective. This is also known as your target asset allocation.

You may get inspired by Morningstar’s research-backed advantage allocations to the retirement portfolio

Pick your investments
Next, set your criteria for picking investments. For example, you may favor mutual funds over individual stocks. You may also have preferences for passive versus active investments.

Create a monitoring schedule

Decide how often you will review your portfolios. You should monitor your investments at least once per year, but no more than once per month. As the stock market changes, you may notice your asset allocation no longer matches your target percentages.

For example, if the stock market performs well, you may have too high of a percentage in stocks. This may be an opportunity to rebalance or shift back to your original percentages. You can do this by selling some of your stocks and replacing them with more bonds, or vice versa.

You’ll want to consider rebalancing once your investments shift by more than 5-10% of your target. Before making changes, though, you should always consider the tax implications: In a taxable account, like a brokerage account, selling an investment could trigger capital gains taxes.

But if your money is in a tax-deferred account, like your 401(k), you won’t have a problem as long as you don’t withdraw the money. The same rule applies to tax-free accounts like a Roth IRA.


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