Investor policy statement 2019

Investor policy statement 2019

What stocks or funds should I buy? Which account should I fund first? Should I invest now or wait and try to time the market? I am 100% invested in VTSAX (US total stock market index) and my portfolio just dropped 20%; I’m going to sell off and lock in some serious losses. If you spend time in online personal finance groups or forums, you’ve probably seen many of the questions and comments above, all of which indicate that the individual does not have an Investor Policy Statement (IPS). Reading What I Learned Losing a Million Dollars made it clear to me that I need an IPS, since the authors make a strong case that there are nearly infinite (and often conflicting) ways to make money, but relatively few ways to lose money. The lesson is clear: to avoid losses, investors need to develop and stick to a plan. There are a number of good online resources for developing an IPS–for example check out Physician on Fire and search “investor policy statement.” The sections below contain our 2019 IPS, which I hope you can use as a template for making your own IPS.

1. Purpose of the IPS

Our IPS serves as:

  1. A set of instructions that ensures we invest in agreement with our values and financial goals.
  2. A foundation to keep us humble in strong markets and strong in humbling markets.
  3. A guide to keep us focused on core investments and away from fad “investments.”

2. Investment philosophy

We will focus on the following investments:

  1. Retirement accounts: low fee US stock, US bond, and international stock index funds.
  2. Taxable investments: in addition to index funds, also develop business and real estate income for diversification and tax benefits.

3. Financial goals

Our IPS will be developed and executed to achieve the following goals:

  1. Establish a securities portfolio with 30x net annual spending by age 45. This goal comes from Kitce’s post that suggests the long term (> 45 year) safe withdrawal rate is 3.5%. The inverse of 3.5% is 28.5x, which we have rounded up to 30x.
  2. Develop business and real estate income that offsets at least 50% of our total annual spending. In other words, reduce the burden our portfolio by at least 50% through passive cash flow.

(Note–as of writing we are 32 years old)

4. Order of operations (asset location)

OrderAccountCommentCurrently Funding
11 month emergency fund
(Ally Bank high yield)
Helps us sleep at nightFunded
2401(k) up to employer match100% return!Max
35 month emergency fund
(Ally Bank high yield)
Helps us sleep well at nightFunded
4Health savings accountSuper retirement accountMax
5401(k) to IRS maxTax-deferred growth Max
6Roth IRA
Not eligible for traditional IRA deferral Max
7Extra principal paymentPay off 30 yr mortgage in 15 yrsYes
8Save for business or real estate
(Ally Bank high yield)
See goal 2Yes
9Taxable brokerage account (Vanguard)Large fraction of net worth is already in stocks and bonds (retirement accounts). Also see goal 2.Not for now

5. Asset allocation (the most important investing decision)

Our long term asset allocation is 70% stocks (50% US and 20% International) and 30% US bonds, based again on Kitce’s post and the “optimal” allocation for a long term retirement. But our shorter term reality is different; we are a number of years from retirement, and we haven’t investedĀ  enough in stocks anyways (30x * 70% = 21x in stocks). Thus we are front loading our stock allocation to minimize sequence of returns risk, and will add more bonds later on. We currently only hold bonds in our tax-advantaged accounts, specifically for re-balancing purposes in case the stock market takes a dump.

Account typeTarget allocationRebalancingChanging target allocationComment
(401(k), IRA, HSA)
55% US stock, 25% Intl. stock, and 20% US bonds index fundsYearlyStarting at age 35, add 1% bonds each year until bond allocation is 30%, US stock is 50%, and Intl. stock is 20%.No tax consequences for rebalancing in tax sheltered accounts
Taxable brokerageCombine with retirement accountsNew contributions, manual reinvestment of dividends and capital gains, and tax loss harvestingCombine with retirement accountsMinimize taxable events
Ally Bank high yield savingsEverything exceeding 6 months of expenses can be invested Invest as account balance and opportunities permitCurrently saving for business and real estate investment

6. Draw-down strategy

Our exact nuts-and-bolts draw-down strategy has not been finalized. Being 32, we still have 13 years to figure out early retirement draw-down (and 30 years to figure out traditional retirement draw-down). Learning how to draw down a large portfolio is a problem my older self will gladly tackle.

Standard disclaimer

The Investor Policy Statement above was formed for our financial goals using research I have performed to date. The IPS is a living document that should adjust to meet one’s changing needs, goals, and circumstances. Please do not take my IPS as investment advice–it is a road map that I am following, but that does not mean it will be appropriate for you.

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