Broker Check
Napa Valley Wealth Management - St. Helena, CA

How to Use Investment Tools of Billion-Dollar Fund Managers

| July 07, 2016
Share |
Investing, Investment Policy Statement

All too often, investors rush into the markets without a clear, long-term investment strategy. Instead, they cling to "make as much as we can before we retire." The problem is: those without a written strategy often base decisions on day-to-day events and end up chasing short-term performance. And history tells us that these investors notoriously follow emotions and wind up buying and selling at exactly the wrong times.

So, how do the Big Boys invest? They use an Investment Policy Statement.

Use the Tool of Billion-Dollar Fund Managers

An Investment Policy Statement (IPS) is a tool used by billion-dollar institutional fund managers, but it's not just for the ultra-rich. It's a very detailed document that outlines your long-term return goals, risk tolerance, investment timeline, tax picture, and investment constraints. Creating an IPS forces you to put your investment goals and strategy in writing, and to commit to a disciplined investment plan.

Creating a personal IPS is a must for all investors.

Sample Investment Policy Statement

Here's a very simplified example of how an IPS might play out. Ted and Donna decide they want to retire at 65, with a lifestyle of $12,000 per month for living expenses, charity work, theater tickets and travel. Given their current assets, liabilities, and tax picture, they need a 6% return to achieve that. This is their long-term total return goal, which includes their income and gains, while considering taxes.  

Next, they quantify their risk tolerance. After detailed analysis with their advisor, they conclude they aren't comfortable losing more than 10% of their portfolio in any given year (or day, week, or month), so they set their risk tolerance level to 9%. Using historical data, the advisor then builds their portfolio with a maximum expected loss of 9%.

Finally, given that Ted is heavily invested in company stock from a Fortune 500 company, their IPS would set limits on further investment in large-cap stocks.

All of these components are then documented to create a personalized Investment Policy Statement for Ted and Donna's advisor. An astute advisor will consult their IPS on every investment decision.

6 Ways an IPS Can Help

Your personal Investment Policy Statement can be an invaluable tool in your wealth-management kit. Here are six ways an IPS can help:

  1. Set Parameters for Your Advisor to Invest By
    By documenting your return goals, risk tolerance, investing parameters, and more, your IPS will help ensure you and your advisor are on the same page, and it will serve as a roadmap for ongoing investment decisions. 
  2. Achieve Your Target Return with the Least Possible Risk
    All too often, investors have the wrong amount of risk in their portfolio. Without a clear understanding of the risk needed to achieve their return goals, they usually carry too much, or even too little, risk. By matching your investments to your risk tolerance and long-term return and income needs, you can help ensure you're carrying the appropriate amount of investment risk for your life plans.
  3. Minimize Your Investment Taxes
    This is an area most investors overlook. Once your tax picture is defined, your IPS will help your advisor better understand the tax implications before an investment purchase or sale.
  4. Avoid Overexposure in the Market
    In Ted and Donna's example, Ted already owns a heavy amount of large-cap, employer stock. His IPS would include a limit on the amount of large-cap stock his advisor could buy. Clearly documenting these types of limitations will help ensure you aren't overexposed in any one asset class.
  5. Personalize Your Holistic Investment Style
    We often meet investors who wish not to invest in certain companies or industries, or who do want to invest in certain areas, like socially responsible companies. Documenting these personal investing preferences in your IPS will help your advisor choose funds that align with your holistic investing goals.
  6. Remove Emotion
    Short-term market swings or life changes can often drive an investor to panic and react. The concept of Behavioral Finance is the Nobel-Peace-Prize-winning theory that investors are driven by emotion to buy and sell at exactly the wrong times. As markets swing, your documented goals will keep you focused on the end game and eliminate short-term, reactionary decisions.

At Napa Valley Wealth Management, we were one of the first independent advisors to bring tools of billion-dollar fund management to individual investors. We do so to help our clients achieve more stable returns with less risk. If you'd like to discuss your investment strategy, we offer a complimentary consultation, over the phone, in one of our offices, or at your home.

Share |