Investment Policy: A Useful Antidote

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Robert T
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Investment Policy: A Useful Antidote

Post by Robert T »

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Having a written investment policy statement (IPS), clearly articulating reasons for your long-term asset allocation decisions can be helpful to stay the course in turbulent times.

Charles Ellis: From Winning the Loser’s Game: Timeless Strategies for Successful Investing
  • "[An investment] policy is the most powerful antidote to panic. The best shield for long-term policies against the outrageous attacks of acute short-term data and distress are knowledge and understanding - committed in writing. Don’t trust yourself to be completely rational when all around you are driven by emotion. After all, you are human too."
Roger Gibson: From Asset Allocation: Balancing Financial Risk
  • "A well-written investment policy statement has several advantages:
    - It supports a disciplined, consistent execution of the portfolio’s investment strategy. This is particularly important during extremely good or bad capital market environments.
    - An investment policy statement provides a defense against “Monday morning quarterbacking,” when prior investment decisions may be second guessed.'
David Swensen: From Unconventional Success
  • "Devoting significant time and energy to the science and art of designing long-term portfolio targets increases the likelihood that investors will develop the conviction necessary to maintain a steady long-term course amid the turbulent crosscurrents endemic to security markets."
Roger Gibson’s book on Asset Allocation, and Frank Armstrong’s book on The Informed Investor, both have sample investment policy statements.

Having an investment policy which clearly states the reasons for asset allocation decisions, with clear rebalancing ‘rules’, has certainly helped me. Perhaps developing an IPS is something to consider for those who were swayed by the recent market turbulance.

Robert
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pkcrafter
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IPS

Post by pkcrafter »

Excellent post, Robert. Should be required reading for all forum participants.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
guest42
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Post by guest42 »

Excellent topic! I had never heard of such a thing, until I accidently stumbled across the following Morning Star article:
http://news.morningstar.com/articlenet/ ... x?id=79486

I was able to modify the article to craft my own Investment Plan Policy.

Have I followed it? Not exactly, but it has helped curb what has been my greatest excess in the past 5 to 10 years.

For decades I managed my own investments, but then illness had me hire a "financial planner" (for 7 years). Aside from that discussion, the best that can be said is my hired help at least performed averagely. What is done is done, and I am back once again managing my own finances. My greatest challange is also my greatest lesson.

No one, knows better then I, what the best investment policy for me is. And what is abundantly obvious, was I was not able to convey that to another human (my hired help). I am ongoing in working out, precisely the details of what that "best investment" strategy for me is.

Putting it in writing, if not perfectly, the first time I set it in writing - certainly ranks right up there, as one of the best tools one can have.

Linda-room42
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Post by chaz »

In times like these, we need all the tools that are out there.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
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grabiner
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Re: Investment Policy: A Useful Antidote

Post by grabiner »

Robert T wrote:.
Having a written investment policy statement (IPS), clearly articulating reasons for your long-term asset allocation decisions can be helpful to stay the course in turbulent times.

Charles Ellis: From Winning the Loser’s Game: Timeless Strategies for Successful Investing
  • "[An investment] policy is the most powerful antidote to panic. The best shield for long-term policies against the outrageous attacks of acute short-term data and distress are knowledge and understanding - committed in writing. Don’t trust yourself to be completely rational when all around you are driven by emotion. After all, you are human too."
And, as an illustration of the point, here is the last paragraph in my Investment Policy Statement, which would make a good last paragraph in many such statements:
Reviewing this Statement:

This statement will be reviewed whenever there is a substantial change in my financial situation, and annually when I rebalance. If there is no substantial change in my financial situation, I will wait at least three months between changing the asset allocation in my statement and changing the asset allocation of my investments, and review the change in the statement at that time.
Wiki David Grabiner
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CyberBob
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Post by CyberBob »

I still like Sunny's IPS the best. Elegantly simple and a rock-solid reference point during troubling times.

Bob
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Adrian Nenu
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Post by Adrian Nenu »

Hi Robert.

Thanks for the very important & timely reminder about the IPS. I have attended dozens of investment club meetings, talked to numerous co-workers, local retirees and financial planners, but outside of the Bogleheads, none use the IPS. Too bad.

Adrian
anenu@tampabay.rr.com
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Robert T
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Post by Robert T »

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David,

Swensen suggests a similar approach for institutional investors [my underline in the quote] (from Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment).
  • “Asset allocation targets ought to be reviewed once (and only once) per year. An annual review allows managers to make changes necessary to move portfolios in desired directions. Perhaps more important, limiting policy discussions to the assigned meeting diminishes the possibility of damage from ill-considered moves made in response to the gloom and euphoria imbuing market conditions.”
______________

Adrian,

Here’s one more from Bernstein’s Four Pillars of Investing which seems to match your observation (my underline).
  • "What is the investor to do during the inevitable crashes that characterize the capital markets? At a minimum, you should not panic and sell out – simply stand pat. You should have a firm asset allocation policy in place. What separates the professional from the amateur are two things: First, the knowledge that brutal bear markets are a fact of life and that there is no way to avoid their effects. And second, that when times get tough, the former stays the course; the latter abandons the blueprints, or, more often than not, has no blueprints at all."
Robert
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pkcrafter
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Post by pkcrafter »

I am currently reading Dan Ariely's book, Predictably Irrational, and while the book is not specifically about finance, it does tell us a lot about how we make decisions.

In one test, Professor Ariely allowed students to make their own timeline to accomplish three tasks. Some students made their timelines as the last day of the semester, essentially imposing no real due date. Others spaced the timelines out, starting much earlier with task 1. The results showed that those who set self-imposed, spaced out timelines had a much higher percentage of completing the tasks than those who set the timelines at the last minute. It is clear from the experiment that not only is it important to write an IPS, but timelines for doing things like adding new money and rebalancing should have timelines included.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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BlueEars
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Post by BlueEars »

I have an IPS in Excel with one sheet for approximately each year. This allows me to look back as the IPS evolves. Most of the changes are fairly small, I hope.

Looked back at the bond section of the IPS and the statement "bonds are the safe part of the portfolio" got bigger and more prominent in the IPS from year to year. This year it is bold faced and in red :) : SAFE part of portfolio .
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