Why we recommend an Investment Plan

As a baker or chef, you would use a recipe.

As a football coach, you would develop a game plan.

As investment advisors, we believe all investors should use a written investment plan.

Having a written investment plan, which we call an “Investment Policy Statement” (IPS), may provide many important benefits to investors and can lead to a better relationship with your advisor.  But having an IPS is not a guarantee for investment success.

The IPS that we develop for each of our clients provides a framework for how their assets will be invested and managed over time. The IPS provides the initial asset allocation, based on a client’s financial situation, risk tolerance, time frame and goals, among other things. Before we begin to invest any client funds, we discuss the IPS with our clients and both the client and our firm signs the IPS.

Having a written investment plan, which helps to guide future decisions and actions, can assist an investor in understanding the advisor’s strategy. For example, our IPS addresses that the investment time horizon is long term (defined as longer than 5 years). Our time horizon and decision making are not based on daily market news or current events. Our IPS explains why we recommend utilizing a globally diversified portfolio and acknowledges that this strategy may not outperform certain indexes over various time periods.

We feel it is important that our clients understand these concepts before we begin to invest on their behalf. We try to educate our clients and discuss these concepts with them.

Having a written investment plan can be helpful in remaining disciplined during difficult market conditions or when current events seem to be negatively affecting financial markets. We generally do not make major changes to a client’s IPS based on the past performance of a specific asset class or because of future predictions or expectations.

We would (and do) modify an asset allocation (IPS) based on changes in someone’s life situation, such as changes in assets or as someone gets older. The key is that changes in the investment allocation are more driven by personal changes, whether good or bad, and not based on predictions about the future of the stock market, interest rates or politics. We strive to provide rational and evidenced-based advice, not decisions driven by emotions, guesswork or predictions.

Risk tolerance is also very important in planning and developing an IPS. We provide written information on how poorly the proposed allocation would have done over many decades in the past. Why do we focus on the negative, and not the positive? Because by showing someone how much a proposed asset allocation did during bad time periods (such as the worst one year to three year losses for a given asset allocation), we are trying to determine if the investor will be able to handle the potential downside of this allocation. We don’t want investors to abandon their investment strategy due to down periods, which will inevitably occur again and again, during an investor’s life.

Having a written investment plan can be an important and evolving document for your financial life.

Like a great recipe, if an Investment Policy Statement is well prepared and followed, it could lead to a good outcome.

We also hope that a written investment plan may help you be more confident and have a greater sense of peace of mind.

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