An important “guardrail” in the planning process is the use of an investment policy statement. This document outlines what investments you own, the corresponding percentages, how much is invested, time horizon, and when rebalancing is necessary. These rebalancing events take place when a portion of your investments strays beyond what is acceptable based on a set time frame outlined in your statement. Often this may be a quarterly time frame, it’s not uncommon for accounts to be reset annually. This avoids you having to jump in and react when emotions are running high. Instead, standing still and letting the account rebalance back to where it needs to be per the investment policy statement tends to yield the best real-life returns.
A good plan has an investment policy statement for each account, much like giving each account a job description and role to play in your plan. Investment policy statements are best suited for investments that hold a time horizon of greater than five years. Any investments or monies needed earlier should be held in a cash account for liquidity purposes. Too many mistakes have been made when investors attempt to create a rate of return on liquidity. Having an investment policy statement will help you avoid this common mistake and better guide your investments. Separating investments from liquidity will create a positive outcome, with better clarity, over long periods of time.
Now that investment accounts have recovered a portion of their compressed prices from March, take a look at where you stand. Does your investment policy statement support decades of income growth and distributions? Are you holding more liquidity or short-term investments that should be rebalanced as you extend your time frame? How many investment policy statements are necessary for you to accomplish what’s important?
What if you don’t have an investment policy statement? There is never a better time to create one than right now. This becomes more art than science when integrating your goals and priorities with your investment accounts. There are many moving parts to an investment policy statement with questions arising to clarify and strengthen the accountability that drives your financial plan. At Flowerstone Financial we are skilled at asking these questions and view goals, planning, and then your portfolio as the order of importance to becoming a successful investor. A proper investment policy statement is reviewed annually and is the glue in keeping your plan on track.