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Winning investment portfolios: don’t forget the playbook

May 7, 2014 by Editor, InvestingForMe

Does your investment portfolio come with a playbook? Probably not! For most of us, our investment portfolios are simply a collection of the individual investment decisions that we‘ve haphazardly made over the years, jumping in here and there, with no real guiding “light,” as it were, in our investing decisions, except for one general simple goal – to make money! And if this investment strategy is working for you, then by all means, have at ‘er!, as they say.



However, for most of us average investors, having some kind of investing playbook to help guide and coordinate our investment decisions would probably be pretty useful, especially when investment decisions become difficult or really scary.

Well, as it turns out, really successful investors always have a playbook in hand before they set out to invest, mapping out and planning their actions carefully just as any successful sports team would. Serious investors create a plan called an Investment Policy Statement (or IPS for short), to steer them without even thinking when it comes to buying and selling. And they commit their plan to paper and they review, practice, and fine-tune their plans before they even make their first investment decision. And so should you if you want to invest successfully, too!

IPS: the playbook for investors

If you don’t already have one, you gotta get one. A properly written IPS is the ultimate operating manual for investors, and the really cool thing is each IPS is a custom job specific to your investments and financial goals. Create one yourself or be sure your investment advisor draws one up for you (and shows you it!) and then use it as a guide for each of your investment decisions.

Here’s how an IPS can help:

  • Keeps you focused. Your IPS forces you to think about, define and commit your investing goals to paper.
  • Coordinates your decisions. Your IPS helps ensure that each of your individual decisions is coordinated, focused and working toward your personal investing goals.
  • Saves you time and makes investment research easier. Your IPS keeps your research efforts focused, so you can ignore all those investment options that don’t fit with your goals. For example, if the IPS says your portfolio’s main goal is to generate dividend income, then you’ve just eliminated all those investments that don’t pay dividends – Canadian and international, not to mention all of those commodity plays. Think of the time and energy you just saved!
  • Helps to avoid investment fads and sales pitches. It’s pretty easy to get caught up in the next great investing idea and jump on a bandwagon, right? Well, an IPS that clearly defines your investing strategy and the parameters that guide each investment decision can help you to just say No! And avoid investing with the crowd.
  • Guides your rebalancing decisions. This is a huge one. How many times have you thought, Gee, I should probably sell some things and take my profits? But then you do nothing! I bet more often than you want to admit. Well, your IPS not only gives you permission to rebalance, it will tell you that you must sell and secure your profits. You have to because it says so in writing!

IPS basics

So, what should your IPS include? Here some of the basics that you should include:

  • The investment portfolio’s purpose: Define your investing goal(s) and what the savings held within the portfolio are to be used for in the future – education, retirement, etc.
  • Dollar value of the portfolio: You should define the dollar amount of the portfolio to be governed by the IPS. In addition, if you plan to add or withdraw savings on a regular basis, this should be stated.
  • Scope: Does the IPS cover only one account (RRSP, RRIF, RESP, TFSA, etc.) or a group of accounts?
  • The portfolio’s investment time horizon: How long will you be saving and investing to reach your investment portfolio’s purpose? Will the IPS be applicable to your portfolio for 5, 10, 20, or 40 years?
  • The expected rate of return: Your expected rate of return states the work required from your savings. It’s an average annual rate of return, a rate of return you want to earn through a complete business cycle. Hopefully, you have already determined your financial starting point, your financial goal, the amount of regular savings to be added to your portfolio and you have calculated the required rate of return that your investment portfolio needs to earn. (For more information on Expected Rate of Return visit Step 5 of the IFM investment approach.)
  • The annual cost guidelines: In this section, you set the guidelines for your investment expenses. For example, you might state that you want to keep your investment costs below a certain percentage or dollar amount, each year.
  • The investment approach or strategy: Are your savings to be invested conservatively, aggressively, or a balance between the two? By labelling your portfolio’s investment approach, you can keep your investment decisions focused on your chosen investment style.
  • The portfolio’s target asset allocation: This is where you state the percentage of your portfolio to be invested in the different asset types – cash, Fixed Income (bonds, Guaranteed Investment Certificates, etc.) and Growth investments (stock market, real estate, private company shares, etc.).
  • The portfolio’s diversification guidelines: This section is often divided into sub-sections with one sub-section for each asset category identified in your Asset Allocation section. So, for example, your Fix Income diversification may state that no fewer than 5 and no greater than 10 individual Fixed Income investments are to be held in the portfolio. Each Fixed Income investment must pay a regular income and must maintain a minimum credit rating, from an established rating agency of “BBB” and no single Fixed Income investment can represent more than 5% of the portfolio’s total market value.
  • Specific investment guidelines or restrictions: State any specific investment restrictions or personal preferences (for example, Socially Responsible Investments (SRI) only, only investments issued by companies/governments from developed nations, no investments in cyclical industries, no liquor or tobacco company investments, only investments that pay an income, etc.).
  • Monitoring and re-balancing guidelines: In this section, you describe the guideline that you will use to monitor and make adjustments to your investments. Typically, you will include a monitoring time frame (monthly, quarterly, or annual). You will also define the criteria that you will use to initiate a decision to sell and buy individual investments. For example, maybe your re-balancing decisions will be made when the portfolio’s allocation to an individual or asset category is exceeded by a certain percentage.
  • Performance benchmark to be used: This is the section that details how you are going to gauge your investing success or failure. Are you going to measure your portfolio’s annual average rate of return by comparing it to the returns generated by the S&P/TSX 60 Index? Are you going to compare your returns to the average within a class of mutual funds? Or are you going to compare your investment returns to what you need to achieve your financial goal?

Get the most out of your decisions – create your own playbook

By planning and writing an IPS you are creating your own investing playbook and having a playbook at your fingertips is going help you to make better investing decisions. A well-written IPS can provide you with a clear investing path to follow and it can help to make your investment decisions easier and less complicated. And by knowing the purpose of your investment decisions and monitoring your investing progress, you’ll be in the driver’s seat when it comes to your investment portfolio and have a greater shot at winning.

Note: Not sure where to start? Try the IPS template in the IFM Tools section. And once you have finished don't forget to save it to My Folder.



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