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Investment Policy Statement

For most of us, intelligent investing is like good nutrition. We understand the principles, we have the best of intentions, but somehow, along the way we get tempted or sidetracked into abandoning our principles, perhaps for a handful of cookies with our morning coffee or by buying that hot new small cap stock your neighbour suggested. The first digression will show up around our waistline in a few weeks, the second, in our portfolio, probably sooner rather than later.

Just the way some people post their diet plan on the refrigerator, you can develop a plan that will guide your long-term financial and investment decisions.

Your Investment Policy Statement (IPS) will be your own long-term written plan to help you decide exactly what your objectives are and establish guidelines for achieving them. It will be a valuable learning experience, too.

You will identify some of your long-term goals and consider such issues as your risk tolerance, your asset allocation, your source for advice, and establishing realistic growth expectations. If you discover that more knowledge is needed to write your IPS, begin by reading or taking a course to assist you with your investment planning. can be your best ally in helping you gain the knowledge you will need.

Your IPS will help keep you on track through bull and bear markets. It will help you avoid temporary enthusiasms that could cause damage and keep emotions from getting in the way of your sound investment planning.

Your investment policy statement is an important document. You can work on it and manage it alone or in conjunction with your investment professional.

A good place to start on this project is to get a copy of “Your Investment Planning Worksheet” from the Canadian Securities Administrators web site at www.csa-acvm.ca or from provincial securities regulators.

This handy form will be your net-worth statement, insurance reminder, and general cash-flow planner. It asks you to rate your investment knowledge and to consider what you would like as a reasonable return on your investment. It is a great beginning to help you find the money to invest. After completing this form, you are about half-way through the process. According to the Canadian Securities Institute’s Wealth Management Techniques Course, “Asset allocation is the single most important step in structuring a portfolio. It is estimated that it accounts for between 80% and 90% of the portfolio’s return.” For your personal investment policy, you should choose among the different classes of investments - cash and equivalents; fixed income products like bonds, mortgages, and preferred shares; and stocks, Canadian, U.S., and international. Stocks can be further divided among small, mid-cap, and large cap companies.

To handle your asset allocation, you may need to learn more about each of the asset classes. You will want to check your portfolio regularly and rebalance it, especially if any single investment or asset class moves above its designated percentage in the portfolio.

You can address other portfolio issues as well. Are you concerned with ethical or social issues in selecting your investments? You will probably want to set an upper limit for how much of your portfolio any single investment can occupy. The limits on a stock or a mutual fund will probably be different. In time, you should develop a criteria for selecting investment products.

When you monitor your investment portfolio, keep your policy in front of you and ask yourself the following questions:

  • Is my expectation of gain in conflict with my risk tolerance?
  • What individual investments are not performing? Why?
  • Do changes in the market or the economy require changes in my asset allocation?
  • Have I established benchmarks against which I am judging my portfolio?

Whether you’re a rugged individualist with a discount broker portfolio or have a valued relationship with your investment advisor, having your own investment policy statement is a valuable tool to help you as an investor to build a strong and lasting financial plan.