Read This Before Investing: The Investment Policy Statement
At some point during the client-advisor interview process, the question of investment philosophy inevitably- and rightfully – comes up. And while it’s imperative for an advisor to have a clear, definable and repeatable process, (the core tenets of our philosophy can be found here) investment selection and asset allocation criteria are- or should be – merely listing the ingredients of a complex recipe without providing any real instruction.
As any baker knows, the secret to success is in how you put the ingredients together!
Enter the Investment Policy Statement or IPS.
The IPS is not a contract and makes no guarantees. Rather, it articulates the types of investments (ingredients) and range of outcomes an investor should expect given their risk tolerance. IPSs vary widely between firms and there is no standard for what’s included. Often they list target long-term allocation ranges- stocks to remain at 60% plus or minus 10%, or various constraints, i.e., large-cap stocks should not exceed 40% of a portfolios. It may also list client wishes to avoid certain industries, rebalancing guidelines and a client’s risk tolerance or risk capacity (future blog post to discuss the importance of distinguishing between the two).
In our Investment Policy Statement, we provide further reasoning for why we’ve chosen to construct portfolios the way we do. Below, we’ve listed some of our investing credos, taken from the acknowledgement section of our firm’s IPS. It is not an investment philosophy, nor is it a contract. Rather, it’s a belief system informing and guiding our investment decisions.
To provide a successful investing experience, we believe clients should agree with or accept the majority of the following:
- “I do not believe the US or entire global markets will cease to exist during my stated time horizon.”
- “Over a full market cycle, I should be compensated for the risk within my portfolio; no more and no less.”
- “I do not anticipate needing money invested in equities for the next 7 to 10 years or more.”
- “Neither I, nor Oak Street Investments knows what the market will do in the coming weeks, months or even few years. However, we believe that investing will produce better long-term results than not investing, and that the longer my time horizon, the greater confidence we have that our performance will be positive and reflective of the risk taken within our portfolios.”
- “Neither Oak Street Investments nor I will try to “time” the market. I acknowledge the markets have had a good run and investing today may mean losses tomorrow… see #4 above and zoom out in your time horizon.”
- “I believe market prices for a given security (and thus groups of securities, i.e. funds) reflect institutional, well-funded, well-researched firms buying and selling securities. These firms represent the overwhelming majority of transactions in the market. In order for one of these firms to buy a stock, there must be another willing to sell. Therefore the market price at which we purchase said security reflects all publicly known information available to these institutions and is likely the best estimate of its fair value. “
- For the vast majority of investors, incurring losses is more painful than the joy of similar gains. I recognize this pain is often the worst time to sell and best time to stay calm or even invest more.
- “I view market (and portfolio) volatility as a necessary trade-off for the higher expected returns equities and fixed income have historically provided over full market cycles.”
- “I accept that while there are inherent risks to investing, there are also risks to not investing: putting my money under my mattress or in my backyard is an investment strategy, though over long periods of time has historically yielded negative real returns and has proven to not be a very good one.”
- The easiest way to not allow the media to dictate your investment strategy is to avoid it! Their business is to attract viewers/readers, not provide sound investment guidance.
Have questions or want to discuss in further detail? Reach out!