It’s often said that to learn what you think about something, write about it. The problem is most of us hate to write. Writing takes us back to our school days when we had to write book reports and essays about stuff we had little (or no) interest in beyond the grade. I was reminded of this when Meb Faber tweeted out a question to his followers about their investment plans and whether they were written down.
Be honest in this poll, it’s anonymous.
Do you have a WRITTEN investment plan? (Including things like asset allocation, rules for new buys/sells, if/when to rebalance, etc)
— Meb Faber (@MebFaber) October 23, 2018
Frankly, I was surprised the number was as high as 25%. This either represents some self-selection bias on the people who follow Meb or straight up some of them are lying. Lying because they know they should have a written plan, but don’t.
If you have a relationship with an investment advisor, in all likelihood you have something that looks like an investment policy statement. If you don’t work with an advisor, Christine Benz at Morningstar has a six-step outline for creating your own. Either way a writteninvestment policy statement is a necessity.
Phil Huber at Huber Financial recently blogged about his firm’s new, slick marketing materials. The thing that caught my eye was the inclusion of eleven “principles” that guide the firms’ investment processes. If you think about it, identifying underlying principles is even more fundamental than generating a working policy statement. This is because that statement should logically flow from higher-order principles. I liked them all including this one:
Principle Four | No Investment is an Island
Like all complex systems, portfolios aren’t single investments but rather intricate webs of raw materials, each influencing the other. The merits of any particular investment, therefore, must be weighed not only in isolation, but also in the context of how it fits and interacts with the rest of the portfolio.
Putting together a written investment policy statement seems/is daunting without having outlined the principles that underlie your investment worldview. As I wrote in a prior post:
Let’s say you think markets are largely efficient and that attempts that active management are largely futile. This worldview would logically lead you to a portfolio strategy that focuses on low costs, low turnover, index funds broadly diversified. In short, your investment worldview should inform your IPS.
The great thing is that your investment principles really shouldn’t change all that much over time. They should be evidence-based, but market dynamics and structure don’t change so quickly that a lot of revisions should be necessary. After a week in the stock market like we had last week, if you don’t have some touchstones to revisit the chances are the volatility is likely to make you act in a way that is not consistent with your future self.