Do you have an Investment Policy Statement? You need one.
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
There’s an effective medium, though, between doing
nothing and panicky trading. These guidelines can
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
advisor 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
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.
Investing in more than one index is also a basic part
of protecting your portfolio with diversification and
asset allocation (two different tactics).
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.
2. 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.
3. 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 comfort during any market.
Diversification does not ensure against loss.
Important Disclosure Information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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