Why bother writing this down, it’s not like we would forget about our financial assets.
From going through the process myself not only have I learned more about myself, what do I want with my future, about different funds and investment option, but the most important is how much more I have still to learn.
The reason we need an IPS (Investment Policy Statement) is to have directions, thinkings and ideas on paper where it’s plain to see and easy to revisit and/or revise. When the ideas are just floating in our heads it’s impossible to scrutinize in detail because there is nothing solid. Once written down we can refer back to it when we need guidance and never have to run into any “I think that sounds about right.” or “I can’t recall but it might be part of the plan.”.
Directions and Targets
The first we should do is set up short term, medium term and long term directions, and set some realistic goals without which we would be lost.
I decided for me short term is 1-2 years, medium term is 5-8 years and long term is 10-15 years, this is entirely up to you, only you can decide the ranges that work best for you.
For my short term I want to buy another cheaper car, currently we have a lease (bad) that is coming to an end this year, it’s time to switch to a much more reliable and cheaper car. Medium term would be to have a kid or kids, maybe move, but that’s merely just a thought. The long term of course is to save enough money work becomes optional.
Once we know where we are going it’s time to decide what are we willing to do, by that I mean how much and how often are we going to contribute. I personally have decided to put aside $500 per pay towards investing, something you need to think about is of course the more you save, the more it grows the better it is for the nest but also it would limit your ability to have a disposable income. It is up to you to decide what is the number you are comfortable with. The idea is: invest early, and invest often.
Once we have decided where we are going and speed, we have to pick the vehicle that will help us get there and ones to avoid. It is also important to know the best investment you could make is to pay off high interest loans, such as credit cards, payday loans or any short term loans that have exceedingly high interests. Most investment “gurus” would tell us use low fee index funds and hold.
Also we have to decide what is our risk tolerance and what are we willing to be exposed to. With lower risk tolerance we would favor more bonds and money markets rather than equity. Exposure means are we looking for US market or global market? Do we want to invest in oil and gas, tech, manufacturing, consumer staples or financial services, there are many many areas to choose from, it is up to to us to decide what we are most comfortable with. I have chosen for myself a 100% equity portfolio including total market of US, Canada, europe and emerging markets, with an emphasis on US and Canada.
I picked 100% equity because I don’t have short term need for this money, I can afford to be a bit more risky. With total market funds I get diversity. Geographical diversity was considered as well, although Canada and the US is closely linked together, I might chose in the future markets that are not so closed linked.
Canadians it’s also important to consider RRSP, TFSA or taxable accounts. I have decided it is paramount to max out TFSA and then RRSP, you on the other hand might be in different situations and would adjust accordingly.
Review and Rebalance
For the average home gamer investor there is no need to pay attention to the market, make changes yearly or every six months, do not try to time the market or predict the market, many have tried, many have failed.
I have gone for a six month review and yearly rebalance regiment. It seems to make the most sense to me, reviewing every six month would give me a good idea of how my investments are doing and catch it fairly early if i made a bad call. Yearly rebalance would give me enough time to let the investments settle down a bit before i make any changes.
I am certain the document will be modified as I learn more.
We are all different, with different situations, it is up to us to add and subtract things as we see fit. The important thing is to have a written document with clear plan for our financial future so we have something solid to fall back on when the going gets tough. If the first iteration wasn’t as successful as we had hoped we can modify and change instead of starting again from nothing, keeping what works and throw away what didn’t.
This is the guide I followed (and general good resources): https://www.bogleheads.org/wiki/Investment_policy_statement