Developing an investment policy statement

I'm in the process of consolidating all of my investments under one roof. This includes:

  • My Roth IRA (currently with Sharebuilder)
  • My profit-sharing pension through the family box factory (currently with Vanguard)
  • My self-employed 401(k) (now at Fidelity)
  • My non-retirement accounts (scattered hither and yon)

Between these accounts I have a large sum to invest. I don't know the exact total (the market fluctuates daily, and I don't really know the value of the Vanguard stuff), but it's over $100,000. That may not be a lot to you, but it's a lot to me. When I was struggling with money, retirement saving was one of the only things I got right. (And that's because it was automatic; I had no control over it.)

Because I have so much to invest, I've begun to speak with financial advisors. Some advisors aren't interested in taking on clients unless they have very large sums to invest (over $500,000, for example). But others are willing to help those who are building wealth. I've spoken with advisors at my business bank, at my credit union, and at Fidelity. I intend to call others, too.

Note: It's not certain that I will work with a financial advisor. I may decide to do this on my own. But I want to explore my options, and I want to experience the process so that I know what it's like.

The problem I keep facing is that I'm not sure what my investment goals are. Advisors ask me, “What do you want to do with your money?” This is difficult to answer. Do I want to protect the money I've already earned? Or do I want it to grow as much as possible? I need to determine my investment goals.

One of the best pieces of advice I've found comes from The Quiet Millionaire by Brett Wilder. This book has been on the top of my to-read stack for months, but I've only recently begun to plumb its depths. Wilder encourages readers to develop an “investment policy statement”:

The investment policy statement should provide specific investment guidelines for you and your investment advisor to follow. The policy should specify how the portfolio is to be structured, the targeted rate of return, the time horizon for expected results, the risk tolerance level parameters, the amount and timing for anticipated contributions and withdrawals, and the emergency liquidity needs.

Having a written policy statement enables you to have a clear reminder about your personal expectations for the portfolio, and it will help you to monitor the performance accordingly. By being organized and prepared, you are less likely to fall into the “emotional investor” category and more likely to stay focused on monitoring the portfolio's performance relative to meeting your specific planning goals and objectives.

I've never made any sort of formal declaration of my investment objectives. I've kept a sort of rough internal guide to the things I want to do (invest in index funds, retire early, etc.), but I haven't written down my objectives or how I mean to reach them.

Do I want to build as much wealth as possible? Do I want to protect the wealth that I have? Am I interested in income? And what is my investment philosophy? Am I willing to accept greater risk in exchange for greater possible returns? How do I feel about administrative costs? Taxes? Diversification?

These questions are not easy to answer. We all want high investment returns with no risk. But those aren't possible. So how do we compromise? How do we develop investment policies that match our values and our goals?

I'm not sure, but I'll be sure to share with you as I find the answers.

For more info on investment policy statements, check out Morningstar: Creating your investment policy statement from Morningstar and Making an investment policy statement from tools for Money.

More about...Investing, Planning

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Writer's Coin
Writer's Coin
11 years ago

I’m curious about your decision to hire an investment adviser after managing to reach the $100,000 all on your own in self-directed accounts. I’ve been thinking about this topic for a while and I’m curious when and why someone decides, “OK, enough of me doing this myself. It’s time to bring in an expert.”

ABCs of Investing
ABCs of Investing
11 years ago

I’m a fan of an investment policy statement but I would suggest for someone who is starting out or just doesn’t have any clear financial goals – then don’t worry about it since it’s not essential.

ObliviousInvestor
ObliviousInvestor
11 years ago

“And that’s because it was automatic; I had no control over it.”

That says so much about how to successfully build wealth. Automation is the way to go. 🙂

Beth @ Smart Family Tips
Beth @ Smart Family Tips
11 years ago

I agree completely about automation. My husband and I are building a decent retirement savings and a large reason for that is the automatic system of investment. We should probably take a look at the specific investments, though, and make sure we’re on the right track to meet our retirement goals.

Baker @ ManVsDebt
Baker @ ManVsDebt
11 years ago

The only problem with automation is not knowing what’s going on. I completely agree that paying yourself first is one of the smartest financial moves you can make. But be sure you aren’t blind to what’s going on with your investments, bills, or over all financial life.

It’s awesome to see J.D. stepping up to the plate and going through some serious introspection. Helps anyone else that has been putting this off (me) maintain focus.

Joshua
Joshua
11 years ago

Oh, this one is easy for me to help you with. May I ask that you do NOTHING with the money until you do two things for me:

1. Contact the BalwdGuy (Jeff Brown) and read his blog at http://www.bawldguy.com

2. Contact David over at Uncommon Financial Wisdom and read his blog at http://shaferfinancial.wordpress.com.

I personally guarantee you that you won’t be sorry you contacted and worked with them.

Carl Marx
Carl Marx
11 years ago

JD, I think you should trust your own instincts and go with that. It is always a good idea to get your goals (you can call it a Policy if you like) down in writing (and if you need more encouragement to reach it, you may even put a copy of it on your fridge or somewhere you will notice it everyday). The thing with goals are that it is personal and should reflect your own style. If you need to see it growing you may need to invest in some cash instrument, if you also want to enjoy it… Read more »

Dividend Growth Investor
Dividend Growth Investor
11 years ago

I would say that you don’t need a financial adviser. After all, you ARE a financial adviser to thousands of people in the US through yourr site. It doesn’t matter that you are not a CFA or a certified investment advisor..
I say you can do it and – GO FOR IT on your own 🙂

Jacqueline
Jacqueline
11 years ago

“I’ve begun to speak with financial advisors”

Financial advisors, as in you pay them an hourly fee, or investment salespeople, as in they get paid commissions for selling you something? There’s a big difference, and both call themselves financial advisors.

William
William
11 years ago

JD, am sure you’re already on this – but be sure to use only “fee only” financial advisors. Other guys only make their money by selling you their products, by racking up sales fees,etc. A family friend is (finally) going to see a fee-only CFA this week — he does a free visit and collects all kinds of info in advance so he can give you advice aligned with your goals — bet you can find the same near you, which will also help you clarify what you want to accomplish.

JerryB
JerryB
11 years ago

Having a solid vision for where you want to go is always a good idea. My current retirement (401k and Roth IRA) value is a bit higher than your’s, and just like you most is from automatic savings and reinvestment. Even at the bottom (if we truly have hit bottom) my 401k was still worth more than my personal and company match investment. I’ve kept watch on the investment options available through Fidelity and have moved most of my funds into target date and investment funds. Traditionally Fidelity and Vanguard keep their expense ratios low on retirement focused funds. I… Read more »

Verdandi
Verdandi
11 years ago

Early this year, I drafted a “financial plan” (which I used to educate my husband on investing). It’s nice to hear the experts suggest having something similar. Basically, I just wrote down our goals, each with the corresponding timeframe, target amount and financial instruments we can use. Now, I use it as guide for our savings and investments.

Chris
Chris
11 years ago

“Fee Only” does not equate to “Value”. I am a financial advisor and we do both fee based business and transactional business. Here’s a little secret for you (I’m whispering in your ear now).. IT DOESN’T MATTER.. I’ve done the math, you will be paying easily around 2% to have someone “advise” or “manage” your money. The industry changes the fee structure just so people think they are getting a deal. We don’t work for free, folks, and you need to be comfortable paying if you use our services. NOW.. I really don’t think you need an advisor. You have… Read more »

Kyle
Kyle
11 years ago

@Chris:

Do some types of funds or investments you deal with give you higher or lower transaction-based income than others do? If you are advising your client to choose the proper investment and the investment you choose for them affects your personal income, isn’t that a conflict of interest?

This is why I think fee-based advising makes everything more clear-cut since it reduces the opportunity for conflicts of interest.

Diane from The Alexandrite Group
Diane from The Alexandrite Group
11 years ago

JD – I agree with #8 Dividend Growth Investor – You are helping people make these decisions through this website. Be weary of the financial advisors who get paid by commission – those advisors may have a conflict of interest. They are not obligated to inform you. While often, fee-only advisors are required to inform you of conflict of interest or full disclosure. No matter whether you pay as a fee-only or percentage of your investments, make sure you know who is offering the advice. It’s like anything time you are hiring a professional – check their credentials. It is… Read more »

Richie
Richie
11 years ago

$100,000 sounds like a lot to me!

ABCs of Investing
ABCs of Investing
11 years ago

I’m pretty sure JD knows about advisors and their potential conflicts of interest.

One thing about getting financial advice is that it doesn’t have to be all-or-none. You can do part of your financial planning yourself (ie picking investments) and then use an advisor to evaluate your asset allocation or taxes or retirement planning or any other topic that you either don’t feel comfortable with or just aren’t interested in doing yourself.

I agree that JD probably doesn’t really need an advisor but maybe visiting a fee-only advisor every 5-10 years for a “checkup” might be an idea.

Claire
Claire
11 years ago

I picked up Ernst & Young’s Personal Financial Planning Guide used from Amazon and found about 5 pages on setting goals in the first chapter. It was handy. Something else I did was to open an account with Vanguard, and a money market account. We put everything “extra” at the end of the month into the money market account. This is for vacations, emergencies, property taxes, etc. Then I have the same amount every month automatically transferred from the money market into a Vanguard index fund to take advantage of dollar cost averaging. Our goals factor into the amounts that… Read more »

Cindi C
Cindi C
11 years ago

The book I’d recommend is called “Smart women finish rich: 9 steps to achieving financial security and funding your dreams” by David Bach. It is at the local library here in Portland. Look for the chapter on setting goals. Bach takes you through a great goal-setting scenario that gives you a bigger vision of why to save and invest (and it’s not just specific to women)

Kristia@FamilyBalanceSheet
11 years ago

Oh this is so timely for me…I just got off of the phone with our fin. advisor to have her cancel our next automated ira contribution, not because we are stopping completely, but I am taking over control of our iras and going with Vanguard. I don’t want to pay the high fees anymore. In a few months, I will transfer all of the money at the high priced actively managed fund company over to vanguard. I know our timeline and our goals. My heart is pounding, but I feel very empowered!!

Brad @ Twenty Something Sense
Brad @ Twenty Something Sense
11 years ago

Two things JD: 1)You need an investment advisor who is aligned with your interests (maximizing return while minimizing risk), not one whose primary interest is making money off of your investment portfolio. The only advisors I know of whose interest will align with yours are those that do not collect any transaction fees or a yearly percent of your portfolio. You need an advisor that you pay by the hour similar to a lawyer. They have no incentive to promote excessive churn or risky bets and instead they will be focused on doing what is best for you so you… Read more »

Kent @ The Financial Philosopher
Kent @ The Financial Philosopher
11 years ago

J.D: As you know, I’m a financial planner (CFP) and a “fee-only” investment adviser. So there is the disclosure… Anyone here who “advises” you why or why not you should hire an adviser is completely unqualified to give that advice, especially assuming they do not have intimate knowledge of your finances, lifestyle, emotional disposition, and personal preferences. Hiring an adviser has the same logical premise as automation — both limit self-defeating behavior and free more time for meaningful pursuits. Of course, advisers are susceptible to human error, but here is how to limit that potential for error: 1. Hire a… Read more »

Felipe
Felipe
11 years ago

You clearly need to write a plan for your investment goals. You have investigated and written about personal finances for several years and now you need to condense all that stuff in just one or two pieces of paper. It’s going to be simple and you’re going to have some doubts but Betrand Russell said
“Not to be absolutely certain is, I think, one of the essential things in rationality.”

And about the financial advisor. I bet the name of the one you’re going to hire is JD.

Deb
Deb
11 years ago

This truly IS a timely post! 10% of my income is vested in PERS via my employer, and I have no control over the PERS investment. Bugs me, but it’s free money, so I can’t gripe. For my Roth IRA, I’ve been using an FA, and make automatic investments every month. I’m paying a 2% fee, which bugs me, and I recently considered doing it on my own via Vanguard or Fidelity. The truth is, I am afraid that I would be too emotional of an investor. I’m concerned that I’d make irrational decisions during downturns, or chase higher returns.… Read more »

SeekingLemonade
SeekingLemonade
11 years ago

I have gotten full financial advice, with recommendations, from my IRA custodian.

Most of them will do this no charge if you have enough money with them.

As it is, I use T. Rowe Price. And for the record, they did not push their products. I have other monies elsewhere as well as stock I own, and never once did they try to get me to transfer anything to them.

Masked Financier
Masked Financier
11 years ago

I think that an Investment Policy Statement is a great idea as a guiding thesis behind your investing goals.

I also think that some part of your Investor Policy Statement should refer to making a commitment to start and continue your investment education on an ongoing an consistent basis.

Leanne
Leanne
11 years ago

Totally not on the topic of an investment policy but I found this bit kinda amusing: “I’ve never made any sort of formal declaration of my investment objectives. I’ve kept a sort of rough internal guide to the things I want to do (invest in index funds, retire early, etc.), but I haven’t written down my objectives or how I mean to reach them.” Some folks might suggest you’ve already retired early, since you quit the job you really didn’t enjoy, and are now doing something that seems to bring you pleasure–and has the added benefit of making you some… Read more »

DDFD at DivorcedDadFrugalDad
DDFD at DivorcedDadFrugalDad
11 years ago

Planning and discipline are key– you are heading in the right direction. A fee only planner may be helpful.

Kevin
Kevin
11 years ago

I agree with the others. With that much money, it’s time to leave commission-based “financial advisors” behind you. You’ve moved on to the fee-only “financial planner” stage.

Brian
Brian
11 years ago

JD, There’s nothing wrong with contacting a fee-based CFP for help in this matter. I do recommend investing the time to learn about Asset Allocation and crafting a plan of your own before you speak to a CFP, however. If you feel that you’re being “sold” anything, you probably are! Too often we hear advice such as “stick all your cash into an index fund!” By this logic you would be paying low fees, but you’d also be exposing your entire portfolio to the risk of the market. As the current downturn has shown, too many people near retirement were… Read more »

Dave Shafer
Dave Shafer
11 years ago

I wonder at the logic of hiring an financial planner. Why is it that few ask the right questions as to why they would want to hire a financial planner? For me there is only one basic question to ask. Will the financial planner obtain a greater NET rate of return for me than what I can get doing it myself? The reason I believe that no one asks that question is that the financial planning community has done a great job at obscuring financial reality. Why is it that with all the talk of ethics [fee based planners make… Read more »

Di
Di
11 years ago

We started using a paid financial advisor (through Schwab) when we were moving from “accumulating money” to the “soon to be living off of our money” stage. I am very good at accumulating money, and keeping it well diversified (the planner was shocked how good my numbers were in terms of diversification), but what I wasn’t good at was getting ready to retire and live off of this money. I think when you feel over your head, it is time to get some advice. But we remain in control of our money – we just get quarterly “checkups”.

Dave Shafer
Dave Shafer
11 years ago

Di gives you sage advice, if you feel you are over your head, get advice!

By the way turning wealth into income is a huge issue for most folks approaching retirement.

Kent @ The Financial Philosopher
Kent @ The Financial Philosopher
11 years ago

@ Dave Shafer, comment #31: You make some valid points but your argument is self-defeating. Here’s why: You say: “For me there is only one basic question to ask. Will the financial planner obtain a greater NET rate of return for me than what I can get doing it myself?” I say: Financial planning, done right, has very little to do with getting higher returns on money, but has more to do with getting higher returns on quality of life. If an individual gains personal satisfaction from the acquisition of skills necessary and from the processes of tax planning, estate… Read more »

Dave Shafer
Dave Shafer
11 years ago

@Kent, I need to point out what I said was “Only one reason, the investor is too lazy to CONTINUE to do it themselves. And for the FINANCIALLY lazy there are a host of other ways to obtain moderate returns without having to pay another middleman [woman]!” In no way did I imply that your clients were lazy individuals. Since I was addressing the question the blogger posed, and he is apparently a do-it-yourselfer, my post was an answer to why he should stop doing what he has been doing and turn over his money to a financial planner. You… Read more »

Swami
Swami
11 years ago

“My friends in your business are all very intelligent, like you, and give their clients what they ask for, but rarely disclose their investment results.” Seriously? Because I am in the industry too, and almost everyone I know discloses their performance…Its the first thing that comes up at almost every meeting, even before the financial planning topics–or what you call the financial psychoanalysis… 🙂 “Bottom line where I come from, if you hand your money off to someone, then you should expect to do better than what someone in a indexed mutual fund does.” Agreed if you are hiring some… Read more »

PM
PM
11 years ago

Thyanks Kent & Swami for your response to Dave’s Comments in #31. I personally, don’t feel Dave has any valid points in his post. I would love to see the research done that proves financial advisers actually lower the rate of return [slightly] for folks compared to their DIY peers! Since I agree with Kent and Swami that planning is just as much qualitative as is quantitative. (Both are important) I would assume it is impossible to provide that research since most investment clubs and DIY investors are not required to report their returns. Not to mention, it is the… Read more »

HH
HH
11 years ago

“roughly 75th percentile, meaning 75% of the universe of large core equity managers out-performed the index last year”

Is there a link for that information? According to S&P it’s the other way around, where the index beats 70-80% of the managed funds.

http://www2.standardandpoors.com/spf/pdf/index/SPIVA_Report_Year-End_2008.pdf

HH
HH
11 years ago

For the DIYers, here’s a simple strategy to avoid the large drawdowns of a bear market. Abstract “The purpose of this paper is to present a simple quantitative method that improves the risk-adjusted returns across various asset classes. A simple moving average timing model is tested since 1900 on the United States equity market before testing since 1973 on other diverse and publicly traded asset class indices, including the Morgan Stanley Capital International EAFE Index (MSCI EAFE), Goldman Sachs Commodity Index (GSCI), National Association of Real Estate Investment Trusts Index (NAREIT), and United States government 10-year Treasury bonds. The approach… Read more »

Kent @ The Financial Philosopher
Kent @ The Financial Philosopher
11 years ago

Great points, everyone. The greater point with investing is that a financial planner, specializing in investment management, can in fact use indexing and provide added value for their clients. This value is obtained through asset allocation. A Certified Financial Planner (CFP), can go beyond investments and asset allocation and save clients thousands of dollars on tax strategies alone. Even further, as Ralph Waldo Emerson said, “The cost of money is often too high.” How much is your time worth? I believe a financial adviser’s greatest value is in the ability to view their clients’ money logically, and largely without emotion.… Read more »

Dave Shafer
Dave Shafer
11 years ago

The definitive study is the BCT study done by Harvard/Morningstar researchers [2006]: synopsis at this link: http://www.people.hbs.edu/dbergstresser/dbjchpt_morningstar.pdf

You will note that the investors without advisers outperformed those with advisers 6.6% to 2.9% in the period studied. Do advisers outperform index funds? No. Do advisers provide superior asset allocation? No. Do advisers help investors correct bad behavior like chasing performance? No, they actually contribute to that behavior!

I will let the readers decide what to do with this information!

Marie
Marie
11 years ago

I’m looking forward to seeing what you end up with. I desperately want to consolidate our 6 million accounts, and it’s so hard to choose one place when you’re shopping for the best value in several different categories.

30 Something Planner
30 Something Planner
11 years ago

Very interesting debate, folks, and information on both sides of the coin is readily available. For example, here are a couple of studies that state the complete opposite of your premise, Mr. Shafer: http://stockmarketeers.blogspot.com/2005/07/why-investors-underperform.html (For more recent commentary, select the Mauldin link at the bottom of the above article.) The fact is, investing is a very long-term initiative, and individual investors often treat the area like a “Fruit of the Month” club. I for one have multiple clients who have tried to abandon their long-term strategy over the past months. Any one of them on their own would have significantly… Read more »

Dave Shafer
Dave Shafer
11 years ago

Since I seem to be the designated bad guy, I must point out that the studies you linked had almost nothing to do with performance comparisons between advised and non-advised investors. Again, in this forum I was posting about a DIY who was considering hiring a financial planner. Now I am sure you do a great job for your clients, but the studies demonstrate that, on average, financial planners don’t do as well as DIYs nor index funds. That’s the facts. Spin them anyway you want, but you can’t change the facts. Here is another fact, the numbers the BCT… Read more »

Investment Blogger
Investment Blogger
11 years ago

Interesting discussion. Given all that has been discussed here I’m curious to know why is it that financial advisors are so focused on investing (helping clients select & purchase investments)? Perhaps overly focused on that? I wonder also, on average, if the financial advisors out there DIY investors? Or do they subcontract to another financial advisor? Why / why not? If they are DIY investors, aren’t they too susceptible to self-defeating behavior? Would subcontracting to another financial advisor solve that issue, if they too have the same condition? How can people identify that type of behavior in someone else?

Emily
Emily
11 years ago

If you are writing up your IPS, I recommend that you have a look at a couple of great examples at http://www.bogleheads.org/wiki/IPS . I particularly like Sonny’s which I am adapting for my own use. I highly recommend the Bogleheads forum if you are interested in the investing side of personal finance. I have learned a tremendous amount just in a couple of months by reading the forum.

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