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I enjoy internet forums. Before I had a blog (or an investor policy statement), I was a lurker (non-participating reader) of several forums for quite a while. After launching this site, I’ve become a more active participant.

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I’ve also launched a couple of groups of my own where money conversations take place daily. Namely the fatFIRE Facebook group (for everyone) and a group for medical doctors only (Physicians on FIRE).

You can learn a lot when a question is raised and then answered by dozens of interested people with different backgrounds and perspectives. Crowdsourcing for a solution to any dilemma can be a great way to help you make a decision or simply become more educated on a topic of interest.

A frequent question that comes up on the forums I frequent looks something like this:

 

“Which is better, a Small Cap Index Fund or Small Cap Value Fund?”

“I’m starting a Roth IRA. Should I use a Target Date Fund, a Total Stock Market Fund, or a 3-Fund Portfolio?”

“My 401(k) has expensive investment choices. Which of the following lousy funds should I have in my 401(k)?”

“I received a bonus / windfall of $10,000 / $100,000 / $1,000,000, How should I invest it?”

“What do you think about investing in Tesla / Apple / Facebook, etc…”

The answer to these 4 questions and hundreds of other similar questions that are posted on the internet everyday is the same exact answer: “You need an investor policy statement.”

 

Investor-Policy-Statement

 

You Need an Investor Policy Statement

 

To answer any of these investment questions in isolation is problematic. The specific answer to the question proposed depends on a wide variety of factors that are rarely disclosed.

I’d like to help, but I cannot responsibly tell you which fund(s) I think you should hold in a particular account without knowing what holdings you’ve got elsewhere, what your desired risk tolerance and asset allocation might be, your time horizon, or your goal.

If you don’t know these things yourself, we need to establish them first. This is where the Investor Policy Statement (IPS) comes into play.

Note: This post was originally written in 2016 and has been edited and updated with my latest post-retirement IPS in 2020.

 

What is an investor policy statement?

 

IPS

An IPS is a list of your investing goals and strategies, incorporating your risk tolerance, desired asset allocation, and specific plans to achieve them.

 

Where can you get an Investor Policy Statement?

 

My first IPS is below If you want it, you can have it, although you will certainly need to change it to adapt it your own situation.

A much better solution would be to create your own from scratch based on your life circumstances, goals, and risk tolerance.

 

 

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The Original Physician On FIRE Investor Policy Statement

 

Crafted in 2016

     Objective:

  • Retire early, no later than age 54 / empty nest, most likely earlier.
  • Acquire a large cushion, with > 36x annual expenses and > 50% available before 59.5.

 

     Philosophy:

  • Invest in a diverse portfolio of Vanguard Index Funds, keeping expenses low.
  • Accept market returns, rebalancing with monthly investments.
  • Risk tolerance quite high. Anticipate withdrawal rate < 3%.

 

     Asset Allocation

  • 60% US Stocks, 22.5% International, 7.5% REIT, 10% Bond / Cash.
  • U.S. stocks: Lean toward small and mid-cap value to maximize potential long-term return.
  • International stocks: 50% Developed, 50% Emerging Markets

 

     Other Considerations:

  • Maximize tax deductions via 401(k), 457(b), HSA, donor advised fund. Front load 457(b).
  • Annual backdoor Roth contributions of $5500 each (spouse and I) in January
  • Tax loss harvest when possible, which will require some attention to balances.
  • Fund boys’ 529 accounts (each February & August).
  • Invest in taxable account monthly.
  • forego monthly investment to taxable account to cover large expenses(vehicles, home improvement).

 

     Pre-retirement Considerations:

  • Research health insurance options.
  • Part time work as an option to transition to retirement.
  • Consider what’s best for the boys / family.

 

     Drawdown Plan:

  • Set up 457(B) to pay $1000 to $2000/ month.
  • Receive dividends and capital gains as cash transfers to bank account.
  • When cash is needed, sell taxable assets and minimize / optimize capital gains.
  • Attempt to remain in 15% tax bracket to avoid taxes on capital gains (unless tax laws change).
  • Convert 401(k) / IRA to Roth as income / tax bracket allows.
  • Donate appreciated securities to Donor Advised Fund when needed to maintain low tax bracket.
  • At 59.5, evaluate 401(k) / IRA and estimate RMD’s, which kick in age 70.5.
  • Anticipate delaying Social Security to get the maximum benefit, assuming good health.
  • Pay for boys’ college with $2000 to $4000 cash (to obtain tax credits), then tap 529’s.

 

     Retirement Asset Allocation:

  • 10 years of expenses in bonds (in 457(B) and 401(K)).
  • Remainder in Equities, maintaining 3:1 US / International Ratio.
  • Consider decreasing REIT holdings to 5%.

 

M3 Global august 20202

 


 

Why Do You Need an Investor Policy Statement?

 

That’s a fair question, and I’ll admit that need is a rather forceful word, but there are many benefits to creating an IPS. You can get by without one, but you really ought to have one. Here’s why:

 

  • It defines your desired asset allocation. This is the keystone to a solid IPS, and if you don’t want to bother with creating an IPS document, you should at least start by coming up with a sensible asset allocation and writing it down.

 

  • Creating an investor policy statement forces you to define your goals and make a realistic plan to help you achieve them. In my experience, it’s way tougher to get somewhere if you don’t know where you’re going or what mode of transportation you’ll be using.

 

  • An IPS will make you less likely to jump from one investment to another. Investing with emotion and acting on recent performance data causes many a casual investor to chase returns, buy high, and sell lowir?t=ph0c43 20&l=as2&o=1&a=B00YZR5BFS. These activities will decrease long-term returns and make reaching your goals more difficult and less likely to happen. Sticking with your IPS and updating it infrequently will help you “stay the course” and avoid costly mistakes.

 

  • If you work with a financial advisor, creating an IPS together will ensure that your advisor understands your goals, and that he or she is helping you invest your money in a way that is consistent with your stated goals.

 

  • While drafting an IPS, you can expect to learn more about investing, about yourself, and about how your goals can best be achieved, particularly if you are not initially well-versed in personal finance when you begin.

 

 

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How to Get Started With Your Investor Policy Statement

 

Start with the basics. Determine your risk tolerance, and come up with a reasonable, preferably simple, asset allocation. Take some time to consider your goals. Talk with your significant other if you’ve got one. When you’ve got some goals figured out, write them down.

Take time to understand the investment options available via the workplace and externally, and how to best utilize them to reach your goals.   Your IPS can be much simpler than mine and could fit on an index card. The specifics can wait. You can make it as detailed as you like, of course, and I’ve seen some much longer than mine, too.

 

Where can I find additional resources?

The Bogleheads Wiki has examples and links to threads with many more examples.

The White Coat Investor has written a How To Guide on writing an IPS.

Review my articles on DIY Investing and Investing Basics for Professionals.

Google is a great starting point for the answer to just about anything, ever.  This link is set up to search Google for you, so you don’t have to.

I’ll point out that you’ll see this document referred to as an investment policy statement or investing policy statement on other sites. I went with investor because you, the investor, are creating the document and it’s your behavior as an investor that will be influenced by what is written down.

 

 

The Evolving Investor Policy Statement

 

Your IPS is a starting point. You shouldn’t fiddle with it on a regular basis, but it should be reviewed and possibly revised when you have major life events like a new job, change in marital status, children, etc… It’s probably a good idea to scratch the dust off every few years regardless of what’s going on in your life.

In this post, I discuss the individual sections of The PoF IPS and the reasoning behind my original choices, explaining the rationale line by line.

I have also written about revisiting and revising an IPS in an update in which I made quite a few changes to mine.

Finally, I updated the investor policy statement again after retiring.

 

My Investor Policy Statement in 2020

 

Objective:

  • Enjoy a prosperous and fulfilling retirement with a strong likelihood of a growing portfolio
  • Potential to leave a legacy (family, charity, or both)

 

Philosophy:

  • Invest most money in a diverse portfolio of low-cost index funds, keeping expenses low.
  • Accept market returns, rebalancing with monthly investments.
  • Risk tolerance quite high. Anticipate withdrawal rate < 2% when fully retired

 

Asset Allocation:

  • 50%  US Stocks, 20% International Stocks, 20% Alternatives (includes real estate), 10% Bond / Cash
  • U.S. stocks: Lean toward small and mid-cap value
  • Int’l stocks: 50% Developed, 50% Emerging Markets

 

Other:

  • Max out individual 401(k) with $57,000 (2020). Consider mega backdoor Roth.
  • Max out HSA with $7,100 in contributions (2020)
  • Annual backdoor Roth contributions of $6,000 each (spouse and I) in January
  • Substantial annual gifts to charity & donor advised fund in accordance with PoF charitable mission
  • Tax loss harvest when possible
  • $10,000 in total to 529 accounts to maximize MI state tax deduction
  • Attempt to optimize taxable income to take advantage of Sec 199A deduction of 20% of Qualified Business Expenses

 

Drawdown:

  • Set up 457(B) to pay $4,000 to $5,000/ month to deplete by the end of 2025
  • Plan to receive dividends and capital gains as cash transfers to bank account
  • When cash is needed, sell taxable assets and minimize / optimize capital gains
  • At 59.5, evaluate 401(k) / IRA and estimate RMDs, which kick in age 72
  • Pay for boys’ college with $2,000 to $4,000 cash (if income makes us eligible for the American Opportunity Tax Credit), then tap 529s
  • Roth Conversions as appropriate to optimize taxable income

 

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Do you have an Investor Policy Statement? Do you revisit or revise it? How often?

46 thoughts on “You Need an Investor Policy Statement”

  1. I’ve been fine tuning my IPS for awhile but struggle to finalize it. I think what makes it difficult for me to finish it is I can’t predict how many kids my wife and I will have or where I’ll end up working after I finish fellowship. When in your career did you first make an IPS, and do you have advice for how to account for these unknowns?

    Reply
    • You’re way ahead of the game if you’re fine tuning an IPS before finishing fellowship. Strong work! I came up with mine last year after 8 years in practice. It incorporates some ideas that I’ve had for a long time, and a plan that coalesced more recently.

      An IPS is meant to be a dynamic document. You shouldn’t change it weekly, but it is never “finalized”. A quarterly review is reasonable, but probably more frequent than necessary. Yearly might be just fine, with an additional look with any major life or career change.

      Reply
  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
    • I hear you. Need is perhaps too strong a word. I am fairly new to the concept myself and benefitted from buying and holding investments before I really had a cohesive plan. Creating my IPS helped me organize my thoughts and forced me to research tax implications of withdrawal strategies. I’m in a better position now, having created one, and I recommend for any investor, particularly the DIY variety.

      Reply
  3. I agree with the message of this post wholeheartedly. I do not have a written IPS today and (after returning to this post several times) this post is helping to persistently nudge me in the right direction.
    Without taking anything from the above, consider reading the recent Medscape Article here: http://www.medscape.com/viewarticle/862830. If it hits home with you as it did me, you may make some tweaks to your IPS on your next quarterly review.
    Thanks for all you do. Keep it up!

    Reply
  4. You’re right; I used the word “consider” a number of times. Most are future “considerations” so I don’t have to have my mind made up just yet. I was much more demonstrative in the title. You Need an IPS! A little clickbaity, but decisive.

    Reply
    • Word. As I said, it worked… I keep looking back – “PoF is right.” One day soon I’ll make time for doing it instead of re-reading why I should!

      Reply
  5. I love this post and have been meaning to do a IPS, so it was really helpful seeing yours and how detailed it was. Quick question, what do you mean by

    “Forego monthly taxable deposits to cover large expenses (vehicles, home improvement).”?

    Reply
    • Thank you, Tip!

      I could have worded that phrase better, and I will. New wording is “forego monthly investment to taxable account to cover large expenses….”

      In other words, if I need a $20,000 car or a $30,000 kitchen, I will hold off on making my usual low 5-figure taxable investment for a few months to pay for the big ticket item with cash.

      I hope that clears it up.

      Best,
      -PoF

      Reply
  6. This is a great post. Taking time to write down your IPS is an occasion to reflect on your values and draw a concrete plan. I’m spreading your word in my blog too 🙂

    Reply
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  11. So important to have a written financial plan!

    It makes all of these decisions relatively easy. Like anything else, when you plan in calm times, making decisions in turbulent times becomes automated, unemotional, and straight forward.

    This is the first step towards financial freedom in my opinion. Too many people try to skip this step and “figure it out on the way.” That’s a big mistake in my opinion.

    Thanks for sharing!

    The Prudent Plastic Surgeon

    Reply

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