The First Commandment For Managing Your Money Like A Pro
Have you ever heard the term, "Investment Policy Statement?" .. Well if you haven't then don't feel bad because neither have most other investors!
What is an Investment Policy Statement (IPS)? It is a document that puts in writing your personal approach to investing, from your lifetime goals to the parameters of your asset allocations. And this modest document can be crucial because it helps with what may be the most difficult task in investing: sticking with a disciplined agenda. In other words, it protects you from yourself!
If you don't believe you need that type of guardrail from time to time, then you're probably kidding yourself, or else, you really have blocked the past few years of market performance from your mind. Certainly no professional would ever dream of managing money without an IPS!
There are two ways to establish an IPS: one way is to have a consultant assist you in preparing your policy statement, which can cost as much as $400. And a good source for locating such professional help is through the National Association of Personal Financial Advisors (NAPFA) which you can find at www.napfa.org.
A second way to establish your very own IPS is to create one yourself by following these steps.
1) Assess Your Tolerance For Risk. Are you a gambler or more like a widow-from-Dubuque type? Beyond your natural tendency to take risks, consider factors like the dependability of your income and your age. Be very honest on this point because you can't make smart decisions about your money until you solve the risk piece of the puzzle.
2) Identify Your Specific Goals. Investors frequently obsess over successes that don't matter such as, "Did I beat the S&P 500?" Instead, every investment decision you make should bring you closer to goals that really mean something. Beating a benchmark won't help you to live the kind of life that you seek. Instead, make your objectives tangible by assigning them dollar amounts. For example, write down that you'll need $300,000 by the year 2020 in order to put your 3-year old twins through college. Such targets will help you decide whether to aim for a high but somewhat risky return, or a safer and somewhat more average return.
3) Allocate Investments. Decide exactly which asset classes you'll own - large-cap growth, small-cap value, etc., and how much money you'll allocate to each. Jotting down allocations makes it easier to maintain your plan in good markets as well as in bad ones. Even more importantly, it removes the "I gotta do something" temptation.
4) Rebalance Intelligently. Investors regularly buy and sell at exactly the wrong times. While the market may be unpredictable, investors are all too easy to figure out. They consistently get caught up in the events of the moment and let their emotions drive their investment decisions. But you can prevent this from ever happening to you by mandating in your IPS that every quarter or six-months, you'll rebalance your portfolio and put each sector back to its original allocation.
Such an agenda forces you, without even having to think about it, to buy low and sell high. And after all, isn't that investing's first commandment?... Or as Bob Brinker would say, "It's a No Brainer!"
* * * * *
What is an Investment Policy Statement (IPS)? It is a document that puts in writing your personal approach to investing, from your lifetime goals to the parameters of your asset allocations. And this modest document can be crucial because it helps with what may be the most difficult task in investing: sticking with a disciplined agenda. In other words, it protects you from yourself!
If you don't believe you need that type of guardrail from time to time, then you're probably kidding yourself, or else, you really have blocked the past few years of market performance from your mind. Certainly no professional would ever dream of managing money without an IPS!
There are two ways to establish an IPS: one way is to have a consultant assist you in preparing your policy statement, which can cost as much as $400. And a good source for locating such professional help is through the National Association of Personal Financial Advisors (NAPFA) which you can find at www.napfa.org.
A second way to establish your very own IPS is to create one yourself by following these steps.
1) Assess Your Tolerance For Risk. Are you a gambler or more like a widow-from-Dubuque type? Beyond your natural tendency to take risks, consider factors like the dependability of your income and your age. Be very honest on this point because you can't make smart decisions about your money until you solve the risk piece of the puzzle.
2) Identify Your Specific Goals. Investors frequently obsess over successes that don't matter such as, "Did I beat the S&P 500?" Instead, every investment decision you make should bring you closer to goals that really mean something. Beating a benchmark won't help you to live the kind of life that you seek. Instead, make your objectives tangible by assigning them dollar amounts. For example, write down that you'll need $300,000 by the year 2020 in order to put your 3-year old twins through college. Such targets will help you decide whether to aim for a high but somewhat risky return, or a safer and somewhat more average return.
3) Allocate Investments. Decide exactly which asset classes you'll own - large-cap growth, small-cap value, etc., and how much money you'll allocate to each. Jotting down allocations makes it easier to maintain your plan in good markets as well as in bad ones. Even more importantly, it removes the "I gotta do something" temptation.
4) Rebalance Intelligently. Investors regularly buy and sell at exactly the wrong times. While the market may be unpredictable, investors are all too easy to figure out. They consistently get caught up in the events of the moment and let their emotions drive their investment decisions. But you can prevent this from ever happening to you by mandating in your IPS that every quarter or six-months, you'll rebalance your portfolio and put each sector back to its original allocation.
Such an agenda forces you, without even having to think about it, to buy low and sell high. And after all, isn't that investing's first commandment?... Or as Bob Brinker would say, "It's a No Brainer!"
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posted by Bob Moser at
6:29 PM
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