- Do you have a disciplined process and documentation for your investment strategy?
- Does your salesperson/broker provide an Investment Policy Statement to set clear investment objectives, guidelines, and expectations?
“Successful investment takes time, discipline and patience.”
– Warren Buffett
In our experience, no serious pension or endowment would invest without first creating an Investment Policy Statement. At Essential Partners, our client partners receive the same institutional rigor and discipline. Further, this document is instrumental for our business clients to reinforce their internal controls and procedures.
During periods of financial market volatility, a clear Investment Policy Statement will reduce behavioral mistakes that often lead to people violating their asset allocation by selling low (fear-based loss aversion) or buying high (greed-based fear of missing out).
A well-crafted Investment Policy Statement used in conjunction with a long-term personal financial forecast establishes the discipline and long-term orientation for our client partners to reach their financial objectives without taking undue risk. Please review the example below.
INVESTMENT POLICY STATEMENT EXAMPLE: THE SMITH FAMILY
The purpose of this Investment Policy Statement (IPS) is to establish guidelines for the investable assets of the Smith Family that will be managed by Essential Partners.
OVERVIEW: Essential Partners will be managing the financial assets of the Smith Family and the primary goal is long term capital appreciation without undue risk in coordination with their financial goals and forecast. Tax mitigation strategies will be utilized to maximize after-tax returns. The allocation, outlined below, considers only the investable assets managed by Essential Partners.
OBJECTIVES & APPROACH:
- Produce capital appreciation over the long term with a reasonable level of risk
- Generate total portfolio returns 4-6% above the short-term interest rate on cash equivalents over the long term, which will allow the family to reach their long-term financial objectives
- Maintain a portfolio that is diversified among economic environments (rising/falling growth, rising/falling inflation) and asset classes (equities, fixed income, commodities, etc.) while tactically positioning the portfolio over time
- Invest primarily in a portfolio of liquid assets comprised of index ETFs while selectively utilizing actively managed investment solutions
Given the family’s current cash flow from the family business, it is unlikely they will require distributions for the foreseeable future and in fact, they will be adding to their investable assets with Essential Partners. However, if distributions are needed, Essential Partners will execute total-return-based distributions. In other words, distributions will be executed from the sale of investments as opposed to current income from investments.
Investments will generally be focused on quality securities within each asset class (majority large companies, U.S. government bonds, etc.). Low-cost index ETFs will typically be utilized while also investing in active investment solutions offering certain diversifying and return characteristics.
TIME HORIZON: The investment guidelines are based upon an investment horizon greater than 3 years, but the return expectations have a higher probability of being achieved with a longer period.
RISK TOLERANCES: Based on a score of 63 of 100 as measured by the Grable & Lytton questionnaire and conversations, the Smith Family’s risk tolerance is moderately high for the capital managed by Essential Partners. While volatility is not a true measure of risk, volatility is expected to be modestly less than global equity markets.
ASSET ALLOCATION: Assets are to be aligned as follows in the table to achieve the investment objectives. The portfolio will be rebalanced annually or when market conditions lead to a >20% deviation from target. Tax loss harvesting will be utilized to augment after-tax returns. The range and initial target allocation will be:
|
Asset Class |
Range % |
Target % |
|
U.S. Equities |
20-45% |
35% |
|
Non – U.S. Equities |
10-30% |
20% |
|
U.S. Treasury Bonds |
5-20% |
12% |
|
U.S. Treasury Inflation Protected Securities (TIPS) |
5-20% |
12% |
|
Real Assets (Commodities, Gold, REITs, etc.) |
10-25% |
19% |
|
Cash & Equivalents |
0-5% |
2% |
MODIFICATION: This policy will be reviewed annually to ensure its continued appropriateness and the above-referenced ranges will only be altered after client partner discussions. The target percentage of each asset class may be amended at any time by Essential Partners.
Essential Partners is a registered investment advisor. The information in this report was generated as an example of a one-on-one presentation for a specific client and solely for that client’s own use. Please do not rely on this as your own.