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Now is a Fantastic Time to Review our IPS

Now is a Fantastic Time to Review our IPS

March 23, 2021

An Investment Policy Statement is your guardrail to help keep you on your path

When markets near high records, you wonder, “Is this a bubble?” When markets dive, you wonder, “Is this a crash?” Your biggest question: How do you keep your head on the recent Wall Street rollercoaster?


After one of the most spectacular recoveries in recent years (from the bottom in late March 2020 to present day) both the Dow Jones Industrial Average and the S&P 500 continue to notch record highs – enough whipsawing to make your neck and your retirement accounts ache.


There’s an effective medium, though, between doing nothing and panicky trading. These guidelines can help keep you level-headed even while the markets twist and turn (which they always will).


Your Investment Policy Statement


Revisit or develop your investment policy statement (IPS) at the beginning of every year. An IPS describes procedures, your investment philosophy and style, and guidelines and constraints for you and your financial professional to manage your investments.


An IPS serves as your guardrail so you don’t veer all over, chasing investments or changing your strategy as markets change.


To begin creating your IPS, write down your key investing goal and the year in which you hope to reach it. If this goal will take you years (such as


funding your retirement or paying for a child’s college education), try to figure your own longevity – then add a few more years. Quantify how much your goal costs and remember to adjust the cost upward to reflect inflation’s likely future impact.


Next, set your asset allocation targets for investments. Your IPS needs to fix a range for your asset allocation rather than a static figure for each class. This increases your options for making investment decisions if the markets rise or dip just a little.


Finally, document specifically the market conditions that will spur you to make investment decisions. That way you’ll know what to do and exactly when – not just when your emotions move you.


Consider Index Funds


These are diversified buckets of holdings that follow general market rises and falls. The odds of one or a few companies dropping to zero at the same time are slim. The odds of all the companies going to zero at the same time in an index are practically non-existent.


You may reduce your worries about losing your money – although index values still go up and down – as well as grow comfortable with changing values and learn how to rein in your exposure to those changes.


Three More Tips


Further, consider these three tips:


  1. Forget about predicting the future. Correctly guessing one event is lucky. Nailing 10 events


– that’s prediction. Nobody accomplishes that regarding the markets. Approach investing with no predictions: Being wrong can carry huge costs.


  1. Develop a prudent plan. Include structured processes with decision rules to guide you and that already consider markets always going up and down. The degree of ups and downs you weather depends largely on your tolerance and capacity for risk.


  1. Customize your portfolio. Base it on the principles above and tailor it to you and your situation. Don’t invest based on chit-chat around the (virtual) water cooler, structuring financial moves based on someone else’s situation and needs. To do so sends you chasing investments that are merely hot and not necessarily what’s prudent for you.


Combining and using these principles can provide you some confidence during any market.




Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Dow Jones Industrial Average (DJIA), or DOW, is the most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials. The 30 stocks are chosen by the editors of the Wall Street Journal. The Dow is computed using a price-weighted indexing system, rather than the more common market cap-weighted indexing system.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Asset allocation does not ensure a profit or protect against a loss.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This article was prepared by AIQ.

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