Investment Planning


Investment planning is a very extensive topic. My intent isn’t to be comprehensive or one-stop-shop here. However I will address the fundamental things that you should know and point you to other useful resources.

Typical Investment Mistakes

I am sometimes approached for investment opinions by family members or friends. The questions alone are revealing in terms of how the average investor makes decisions. They very often indicate their lack of understanding – more specifically the lack of an investment strategy using the right principles. Here are a few examples:

Example Mistake #1: What do you think of XYZ stock? Is it a good buy?

What’s wrong with this question?

  • As I indicated earlier, it doesn’t make sense for individual investors to pick stocks. Even the pros can’t beat the market consistently with good stock picking, so why would any individual try to do so?
  • All individual investment holdings need to be evaluated in the context of the overall portfolio. So even if the investor decides to buy an individual stock, they should at least consider:
    • What is the target percentage of stocks vs. other holdings in the portfolio?
    • What sectors/types of stocks do you want to hold and at what percentage allocation?
    • Does this investment provide diversification for the portfolio?

Example Mistake #2: Where do you think the market is headed? Should I cut back on stocks or add more?

What’s wrong with this question?

  • As we demonstrated earlier, market timing doesn’t work. No one can consistently do it successfully.
  • Investors should create an investment policy statement with a target allocation to stocks and stick with it, with periodic rebalancing.
  • It is ok to make periodic adjustments to the allocations to rebalance and/or change the targets based on changes in personal goals or financial situation, but not because of a bet on market direction.

Example Mistake #3: What do you think of this mutual fund? Is it a wise investment?

What’s wrong with this question?

  • All individual investment holdings, including mutual funds, need to be evaluated in the context of the overall portfolio. This includes:
    • What is the target percentage of stocks vs. other asset classes in the portfolio?
    • How does this fund complement my other holdings? Do I already hold a similar type of fund? You shouldn’t look at a mutual fund as a standalone decision without looking at how it fits in your overall portfolio, just as you wouldn’t buy a piece of furniture for you living room without thinking about how it complements the room and the other furniture in the room.
    • What is your ideal target mix of funds by type?

The Investment Policy Statement (IPS)

I recommend that every investor create an IPS. I would guess that the vast majority of investors (90%+), with the exception of those with higher net worth who work with an advisor, don’t have one. The majority haven’t even heard of the concept. So what is it?

“An investment policy statement is a statement that defines general investment goals and objectives. It describes the strategies that will be used to meet these objectives and contains specific information on subjects such as asset allocation, risk tolerance, and liquidity requirements.” See for an example IPS.

For example, an individual may have an IPS stating that by the time he or she is 65 years old their job will become optional, and their investments will return $50,000/yr. in today’s dollars given a certain rate of inflation. This would be only one of many points included in an IPS. It would also include general guidelines outlining what the individual wants to leave behind to loved ones when he or she dies. See Investment Policy Statement – IPS on Investopedia.

How do you create an IPS? One way is to work with a qualified financial advisor who will gather information and build one for you. You can also create your own using the guidance here and on the web, e.g. the Bogleheads website. You can also check out Morningstar, which has a free template. Here is an overview of the steps:

  • Define your investment objectives.
  • Utilize the passive investment philosophy outlined here.
  • Assess your risk tolerance in terms of what percentage of your portfolio you can stand to lose in a given year, being as honest and objective as possible (use past behavior as a gauge).
  • Look at the model portfolios here for ideas and design the one that most closely matches your return goals and risk/reward preference.
  • Use online calculators such as those at Vanguard, Morningstar or Bankrate to determine what portfolio design and savings amounts will allow you to meet your goals.
  • Utilize the example holdings here or research others if you have the time and ability to determine what to buy.
  • Pay attention to tax optimization strategies in terms of where to place assets.
  • Implement your policy slowly over time if your current approach is significantly different than what is recommended here so that you aren’t adversely affected by buying high or selling low, or by incurring significant taxes.
  • I realize that the average investor may not have the ability, interest or confidence to create their own IPS. However, if you have spent significant time on my site and understand the content, you probably have the wherewithal to do it yourself. If not, I recommend you work with a qualified investment advisor who meets the criteria I outlined here.

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