Creating an Investment Policy Statement

I don’t write enough about investing. So when Vik from offered to share an article related to having an investment policy, I was excited to share it. Be sure and leave Vik some good comments and swing by his site to check out more of his writing.

How Do You Make Investment Decisions?

Making investment decisions can be a scary and overwhelming process. It seems like we are constantly bombarded with information about the market – one moment everyone’s excited, and a few hours later they are all disappointed. How can anyone make sense of this? The single most important thing to remember is that your investment decisions are largely determined by your personal situation. Creating a personal investment policy statement can be a great way to clarify your objectives and organize your financial planning.

Establish Your Investor Experience Level

Your investment policy statement is a document that outlines guidelines for you and your investment advisor. The policy should start by establishing your investment knowledge base. Are you an experienced investor, or are you just starting to learn? A financial advisor who understands this will have a better idea of how to communicate information effectively. Morningstar has a great outline to help you get started.

Know Your Investing Goals

The next step is to define your financial goals: what are your goals, how much will they cost, and when will you need the money? For example, one goal could be to have one million dollars at retirement in twenty years. This exercise will help you identify your long-term financial objectives.

Define Your Desired Asset Allocation

The final part of the document should focus on your asset allocation decision. Based on the discussion on financial goals, you can outline your risk tolerance, and select investments that match your objectives and appetite for risk. Less experienced investors should consult a financial advisor to help them complete this section. If you have done a good job defining your financial goals, a professional and ethical financial advisor will have the right pieces of information to make the proper choices on your behalf.

Other Considerations

In addition to helping your understand your financial picture, an investment policy statement also has some legal advantages. If your financial advisor is given an investment policy statement, they must take it into consideration when choosing your investments. In trying to maximize their commissions, some financial advisors may try to sell you investments that are less than optimal. Giving them a well-crafted investment policy statement can help prevent this unscrupulous practice.

In these uncertain times, we seek clarity and objective guidance more than ever before. An investment policy statement is a great first step towards determining what is right for you.

Editor’s note: While I don’t personally use an investment advisor (my investing is fairly simple right now), I think providing them a guideline to follow is an excellent idea. And even though I don’t have an advisor, it’s still good to have a personal investment policy to help guide your own decisions, regardless of the changing times. My goal over the next week is to create my own policy and try and share it here on the blog. Thanks, Vik!

About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon. He created this website back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence. He uses Personal Capital to track his wealth. All the content on this blog is original and created or edited by PT.