Investment Policy Statement

The Financial Analyst Journal did a study on the key components of portfolio performance.

This study showed that 91.5 percent of a portfolio’s investment return is gained through the allocation of the asset classes.  In other words, almost all return is determined by how well diversified the portfolio was.  It did not matter so much what the actual stocks were but what the relationship or correlation was of the stocks in the portfolio.  This study is also another example of how using speculative methods of investing, like market timing, do not add value to the return of a portfolio.

When we do a portfolio analysis for people we show them exactly how they are currently diversified based on the stocks they own in their portfolio.  The next step is to show them how they compare to our broadly diversified portfolios.

Our broadly diversified portfolios have 18 different asset classes, such as: international high book-to-market stocks, emerging countries’ stocks, international small stocks, and global fixed-income securities, each with a low correlation to the others.

This brings us to an important question – how do you know what percentage you should have in each asset category?  The answer is found in the development of an Investment Policy Statement.

Everyone should have an Investment Policy Statement.  When we work with you we determine a few things right from the beginning.  First, how long before you want to take money out of your investments (which is known as your time horizon)?  Second, what kind of risk can you handle?  Third, what is your true purpose for money (i.e. what do you want to use it for or what are you trying to accomplish with your money)?  The answers to these questions will help us in developing your Investment Policy Statement.

The Investment Policy Statement is the written definition of your risk, your time horizons, goals, objectives, and liquidity requirements.  This will define the guidelines on how your money should be managed.  Based on your experience and goals, your portfolio will then be built with the exact percentages you should have in each of the various asset classes to balance your risk, time horizon, and income needs.

The purpose is to ensure prudent, long-term strategies to help you and your coach protect your portfolio from spur of the moment changes that could be caused by reactions to sudden market changes or the latest news on CNN.  Basically, we are trying to accomplish two objectives by having an Investment Policy Statement.We are trying to automate good decision making.   We are trying to eliminate bad decision making.

Having defined processes in place, where we only follow defined rules, helps to keep us from allowing our attitude, our emotions on any given day, our greed, our fear or anything like that influence our decision making.

Once your Investment Policy Statement is complete, you are then ready to invest.  You will then know exactly what percentage of your money should be maintained in each category.

To get started with your Investment Policy Statement just fill out the form below.

[1] “Determinants of portfolio performance,” Financial Analysis Journal, Gary P. Brinson, L Randolf Hood, and Gilbert L Beebower. 1986 Revisiting Determinants of Portfolio Performance: “An Update,” Brinson, Singer, Beebower, 1991.  Determinants of Portfolio Performance:  “An Update,” Benson, Singer and Beebower, 1996.

[2] A prospectus and Form ADV is available upon request.