A Written Investment Policy, Don't Invest a Cent Without It

Once you have done all the homework described in the preceding posts, it makes sense to capture the conclusions and to write down how you will manage your investments - the objectives, the assumptions and the rules by which you will buy and sell. The fancy title for this is the Investment Policy Statement.

This need not be a daunting 20-page document. In fact, try to make it too long and detailed and it won't get done or followed (think of how well those 500 page policy manuals at work are followed!).

Below is a table with two fictitious examples of how such a policy might look. Please note that they are for illustration only and should not be taken as advice. You need to do your own.

Note how the examples differ according to the different circumstances of the investors. They reflect objectives, risk tolerance, time horizon, capacity and interest in actively managing the investments, existing assets and expected returns or income.

One thing not included but which could be is "who decides". Most times, it is an individual decision, but with a couple, it might be valuable to discuss and decide together. If you can't convince your better half, then maybe a buy or sell isn't very good. Men and women think differently and sometimes we men are too action-oriented, sometimes even too aggressive.

Two important benefits came out of doing my own. First, it made me think about what should be in each box and come up with a logic and a reason. My investing is more coherent and less random or impulsive. Second, once written down, it becomes much easier to stick with, especially in times like now when stock markets are not doing so well.

It is important also to realize that a perfect plan may not exist. A "pretty-good" plan is much better than no plan at all. Get started and do one, then improve it later.

The policy should be good for years, though it should be revised when major life changes occur, such as marriage, the arrival or departure of children, a major job shift, illnesses, deaths, retirement, inheritances.