Investment Policy Statement - Example

Task “Investment policy ment” Dear Vera, Following my decision to take a year off, to travel with my wife to various world destinations to enjoy my wealth, I am writing to inform you that, I have picked you as my portfolio manager for the next one year and I need to point out a few things about my portfolio. As a point of departure, I have been sole manager of this portfolio for the last ten years and I can state that I have recorded significant progress in various sectors. I would need you to focus more and ensure that the progressive trend continues until it reaches the breakeven point, which I had projected this year. You would find all the information that regards to my expectations in the investment policy statements that follows in the consequent pages. The said statement will provide a clear –cut guideline on the kind of investments and the applicable strategy to manage the portfolio. This will include the retirement’s portfolio, liabilities assets, risk tolerance level and that concerns my portfolio management. I can assure you that, your experience, financial and accounting knowledge prompted me to choose you as my wealth portfolio caretaker and advisor for the next one year while I am away. I strongly believe that, you will accept my offer and endeavor in producing good results, which will be rewarded accordingly. I am look forward to cooperating with you and make contact with me in case of a sensitive decision. Yours sincerely PERSONAL CHARACTERISTIC Balance Sheet as of August 2023 I. Financial   Level of Wealth Financial Assets Amount ($) Liabilities Amount ($) Investments Assets 120,000 Mortgage on house 900,000 Retirement Assets 80,000 Car loan-husband 100,000 Car loan wife 10,000 Physical Wealth Mortgage on investment 400,000 Ads Pub 340,000 Total liabilities 1, 410,000 Commercial House at Texas 560,000 Equity 1,430,000 Business Truck 150,000 Personal car 80,000 Wife’s car 60,000 Real Estate investment 650,000 Cash 800,000 Total Assets 2,840,000 Total liabilities and Equity 2, 840,000 Projection of income in the next 10 years Financial Assets Amount ($) Projection in the next 10 years Annual Incremental Amount Total incremental amount in 10 years Investments Assets 120,000 $ 420,000 $30,000 $300,000 Retirement Assets 80,000 $230,000 $15,000 $150,000 Physical Wealth Ads Pub 340,000 840,000 $50,000 $500,000 Commercial House at Texas 560,000 1,560,000 $100,000 $1,000,000 Real Estate investment 650,000 2,150,000 $150,000 $1,500,000 Cash in bank 800,000 1,600,000 $80,000 $800,000 Total Assets 2,840,000 6,800,000 $425,000 2,750,000  II. Personal 1. Risk Tolerance My risk tolerance level should be sustained at lower levels as much as possible. A score of eight on the risk tolerance test is a clear indication that am, a conservative investor who is not ready to lose my hard earned wealthy. I have tried as much possible to invest in long term investments, which are less risky. I have avoided short-term investments such as stock exchange, which are profitable but attributed to high level of riskiness. This implies that, the aspects of low risk and maximum profitability should guide all your decisions on investments. In case of a compelling situation to have increased investment in riskier sectors such as, stock, inform of me in advance and ensure all the underlying factors considered for the decision-making are well explained in written. 2. Planning Strategy My fundamental aspect in terms of investment is less risk attributed to investment decisions or opportunities. This means that you can invest in long-term investment projects. This will ensure a secure expected return on the investments. A lot of research of the market trends and the dynamism on the investments policies particularly on the real estate investment’s volatility spill over should be done to ensure decisions tandem with the market milieu are considered appropriately. 3. Retirement Plans Presently I am 36 years old and plan to retire at the age of 50 years. This implies that I have the next ten or fifteen years to work and plan for my retirement. I believe this plan together with my conservatives’ investment behavior will help me receive higher return on my income in the end. I am ready to gamble but not to a high risk level. As indicated in my investment plan, I do not intend to invest more in the riskiest sectors such as stock exchange. I find it comfortable to invest in the long term projects such that the level of gambling is made desirable and the level of risk reduced to minimum. 4. Liquidity Requirements Presently, I do not require much money at my disposal because; my income is adequate in servicing my bills and expenditures, which include children’s schools fees and my wife’s master degree fee among other needs. III. Investment Instructions All the investment decisions should be based restricted to the US market. Any decision to make an international investment should be notified to me at least 3 months earlier to get my consent. However, I recommend a more inclination to the US based investments. 1. Asset Allocation Macro Asset Allocation Particulars   Total (Holistic) Portfolio Investment Portfolio (75%) Retirement Portfolio (25%)   Total Passive Active Total Passive Active Total Passive Active Stocks(ETF & MFs) 4% 4% 0% 0% 0% 0% 0% 0% 6% Bonds 5% 0% 5% 0% 0% 0% 5% 0% 5% Cash 15% 3% 12% 3% 3% 0% 12% 8% 4% Real Estate investment 70% 70% 0% 70% 70% 0% 6% 0% 0% other 6% 6% Total 100% 77% 23% 73% 73% 0% 23% 8% 15% 2. General Topics Considering my investment portfolio above, it is indicative that my concentration is inclined towards passive investment. The sole reason for this kind of inclination is to avoid much wastage of money on taxes and other governmental deductions intended to gain capital returns. On the other hand, the retirement portfolio is inclined towards the active investment because this type of investment is protected against the taxes. This makes is it secure and less risky. In essence, the aspect of taxes should be keenly considered before deciding the percentage of investments in a particular portfolio. This will reduce money lost through taxes. On the section of stock investments, I have not ventured into it in greater percentages. This is in line with my behavior indicated earlier in this IPS. As a conservative investor, I do not want to gamble so much in short term investments, which have higher level of unpredictability, due to the nature of their market trends. This follows that, even the less percentage I decided to put into the stock portfolio investments I used ETFs and MFs. This is because I have a problem of trusting the stock picking style, which is attributed to loosing. I have a plan of investing in start-ups for the next ten years because of their low expenditure rates, which do not exceed 1.5%. This is to ensure that, the rate of return is higher in the end. In the same regard, if you project a possibility of inflation, then I allow you to freeze the stock investments from 4% to 2% and add it to the cash at bank. I believe you will read from my point of perspective on this aspect that, in case of inflation the stock investments will be immensely affected by the abnormal interest rates. 3. Changes in Asset Allocation The overall approach I suggest that you consider in asset change allocation should involve rebalancing my portfolio in a technical format such that, the ratio of bonds to stocks remains at 1%. Currently the ratio is below 1%. However, as at now I suggest that you keep the portfolio as it is until the end of first quarter, then considers the factors of inflation and employment before doing any change in asset allocation. Use of Active vs. Passive Strategies By applying both active and passive strategies on my portfolio as per my score, I believe I will receive a return of between 15%-25%, which is satisfactorily. Since I am a conservative investor, my alpha will be 2-3. Personal evaluation According to my table of projection, you can easily evaluate your progress. For instance, I have projected an annual growth rate of my investments as Financial Assets Amount ($) Projection in the next 10 years Annual Incremental Amount Investments Assets 120,000 $ 420,000 $30,000 Retirement Assets 80,000 $230,000 $15,000 Physical Wealth Ads Pub 340,000 840,000 $50,000 Commercial House at Texas 560,000 1,560,000 $100,000 You can evaluate whether you are able to achieve the goal at half year. Consider the following calculation For the case of Investments Assets $120,000, the annual increment is projected at $30,000, this implies that, at half year we expect an increment of 30,000/2 = 15,000. This implies that, the value of the investments Assets will be $150,000 at half year On similar regard, the case of the commercial House at Texas valued at $560,000, the annual increment is valued at $100,000. At half year the increment is projected to be 100,000/2 =$50,000. This implies that the house will be valued at $ 610,000 at half year. You can apply this procedure throughout the assets and estimate your projection at half year and at the end of the year. Read More