Avoid Massive Investment Mistakes by Using an Investment Policy Statement (IPS)
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An investment policy statement will serve as this voice of reason when you're tempted to invest in risky or currently trending investments.

Welcome to the Stay Wealthy Podcast. Thank you so much for joining me today. I've got a great show for you today. We are talking about investment policy statements. Sometimes people refer to these as an IPS for short, but these are really, really important documents that anyone who's investing their money in the markets should have in place. They're

And most people don't have them. So I want to talk a little bit more about that today, what they are, how to build one, how to put one in place.

But first I want to share a story with you. I have a car that it's about 10 years old and I haven't really done much with it. I kind of just, you know, changed the oil and, and that's really about it. I don't really drive a whole lot, so it doesn't require a whole lot of maintenance, but you know, it's been 10 years. And, and so the other week I decided, you know what, I'm just going to take this thing into the mechanic and just have them kind of fix some stuff up and bring it up to speed. I'm not a car guy, so I'm not speaking car language here, but

you know, I just thought it was time to, you know, make some improvements and get my car back up to speed. So, you know, I searched around Yelp. I found what looked like a pretty good mechanic in my area and,

Brought my car down to him and said, Hey, you know, here's my car. I haven't really done much to it for a long time. I'd love for you to just fix it up and put some things back together and make sure I'm good to go for the next several years. And he said, great. You know, we've been here for 30 years. I know you found us in Yelp. You've read all these great reviews. We're a family oriented business. We'll take good care of you. Don't, don't worry about it. So I said, great. Give him my keys. And, and that was that.

I came back a few days later, picked up my car and he goes, Hey, we, we did such a great job for you. We did all these things to your car. You're good to go for a long time. We, you know, we changed the oil. We replaced all the fluids. We put brand new tires on there. We painted the car. We polished the leather. I'm like, you did what you, you put new tires on my car.

And you painted my car? I didn't ask for you to paint my car. He said, well, you said that you wanted us to fix it up and bring it up to speed. And the paint was starting to chip. And we wanted to make it look good again. And I said, I didn't agree to any of this. He showed me the quote. And it was thousands of dollars. And

Man, I was just really beating myself up over this. And you might be scratching your head right now wondering, how could Taylor make such a careless mistake? Like everybody knows that when you go to a mechanic, you get a detailed quote and you agree to the scope of work first.

before you do any of this stuff. And you're right, this didn't really happen. None of this happened, but this is a hypothetical story and it's a good example of why an investment policy statement is so, so, so important.

It's important for anyone who is investing their hard-earned money in stocks and bonds. And it's even important for people that don't use a financial advisor. If you're somebody that likes to manage money on your own and do your investments on your own, you don't get to escape this. You still need an investment policy statement. For example, maybe you are your own mechanic. Maybe you love to work on your own car.

And on one lazy Sunday morning, you get bored and you decide that you want to start tinkering around with your car and you open up the hood and start pulling things apart and doing stuff to it. And at the end of the day, your car all of a sudden has more problems than when you started. You made things worse.

So just because you don't hire a mechanic doesn't mean you can't cause problems to your own car. And this is why an investment policy statement is so, so critical. The investment policy statement does three things. And we're going to talk more in detail about these three things today. The investment policy statement, number one, it dictates how your money is going to be invested.

Number two, if you work with a financial advisor, the investment policy statement prevents them from going rogue with your money and ensures that they stick to the plan that you agreed to. Just like the mechanic example, if I would have gotten a quote and agreed to scope of work, I wouldn't have had to worry. I would have known exactly what he or she is going to do and exactly what I'm going to pay for it.

And then number three, the IPS helps protect you from yourself so you don't make bad or irrational investment decisions when you're bored one day and decide to open up your computer and just start trading things because you have nothing else to do.

So before we dig into each of these and talk more about what an investment policy statement is and how to create one, I've actually created a free template for all of our listeners to go and download. All you have to do is just go to youstaywealthy.com.

backslash 37. This is episode number 37. So go to youstaywealthy.com slash 37, and you will find the link there. There's nothing to sign up for. I'm not asking for your email address. There's none of that. Just click the link, download the PDF, and you'll get a good example of what an investment policy statement might look like. And you can start to use that to make your own or take it to your financial advisor and show them, hey, I'd like to put something like this in place.

So let's start out with what an investment policy statement is. What is an IPS? Sometimes people think that an IPS is just for these big institutions or foundations that are managing billions of dollars and you don't need one of these. But

What an IPS is, is it's just a document. It can be as short as one page. It doesn't have to be complicated. There are some investment policy statements that are, you know, five, 10, 15, 20 pages long. But for you, the individual investor, you know, we like to say here, perfect is the enemy of great. Like sometimes just perfect

just starting with one page, keeping it simple will allow you just to start this process. And maybe in the future, you can start to add more pages to it as things get more complex.

But it really is just a one-page document. You can type it up. You can write it with a pen and paper if that's your style. But this one page includes basic information such as your investment objective, your time horizon, your income needs,

your risk tolerance, and maybe even your risk capacity. Risk capacity is how much risk do you need to take? Risk tolerance is how much risk are you comfortable taking? So there's two different things. So it might include both of those. And then finally, it'll include or it should include your desired asset allocation. So for example, yours might say something along the lines of,

My objective is wealth preservation, right? You've maybe worked your whole life. You've saved up this sum of money and now it's time to make sure that you don't run out of that money. And so your objective might be as simple as wealth preservation. Your time horizon might be 10 plus years, right? You might have just entered into retirement and you've got the next 10, 20, 30 years to use this bucket of money.

your income needs, it might be nothing. You might not need any income from this specific account today. Maybe you're pulling income from other accounts. Maybe you have other investments like real estate investments that are giving you income. Let's just say, I don't need anything from this account today. Maybe you're working part-time still. And so you just write down, yep, I don't need any income from this account today. I'm just investing it for the long term right now.

And then you might list your risk score. And there's a bunch of risk questionnaires out there for free on the internet. If you go to that website, I just gave you youstaywealthy.com slash 37. I will also link to our risk questionnaire. Again, no strings attached. Just go and take it. You'll get a nice little PDF report. And it'll give you a risk score between zero. I don't know if zero is on there actually.

One and 100. 100 would be you're the most aggressive investor and one would be you should probably just put your money under the mattress. So on your IPS, your risk score should or might be listed and your risk score might say, I'm a 50. I'm kind of right in the middle. I'm a moderate investor.

And then lastly, your desired allocation. And it might be as simple as 50% stocks and 50% bonds. Stocks are the risky stuff, higher risk, higher return. Bonds are the safer stuff, lower risk, lower returns. You've kind of just split it in half and that's your desired asset allocation is to go 50-50.

So you can obviously drill down deeper for each of these variables that I just talked about. Investment objective, time horizon, income needs, risk tolerance, and asset allocation. You can start to make this more and more complicated if that makes sense for you, or maybe you just start to enjoy this process and you really want to document what your plan really is.

So your investment objective, for example, might be different for different accounts. You might have just a plain old taxable brokerage account that has one objective. Maybe that objective is

super aggressive, I want to grow this bucket of money, I'm not going to touch it for a long time. And then maybe your retirement account has a different objective. Maybe it is wealth preservation, you want to keep that money closer to you. So you can start to break it up. And these different accounts have different investment objectives.

Same with your time horizon. Some buckets of your money might have different time horizons than others. Same with your income needs. And then lastly, maybe the one that can really get more complicated is your asset allocation. And again, maybe you just start with something simple like 50% stocks and 50% bonds, but you can start to break up your stock allocation. How much do you want in US stocks? How much do you want in international stocks?

How much do you want allocated to emerging market stocks? How much to REITs, real estate investment trusts? So you might break up those percentages to start to keep you more and more on track. So you don't just put all of your stocks into US stocks. That would be a little bit risky to just put all your money in one country.

Same with your bonds. You can start to break up your bonds into U.S. government bonds, high quality corporate bonds, tips, which are treasury inflation protected securities, etc.

So you can start to build out a more robust asset allocation if that makes sense for you. But again, going back to my kind of mantra of perfect is the enemy of good. If that just sounds a little daunting and you don't know half of what I just said, keep it really simple. Use those basic variables that I just listed. Those are also listed in the template that I directed you to. And just keep it really, really simple and put something down that

As mentioned, if you're working with a financial advisor, it's really critical that you work with them to put an investment policy statement in place. It really surprises me how few advisors take this seriously and really spend time on the investment policy statement. We don't move forward with any client on anything until we have that investment policy statement discussion. We put it in place and everybody signs off on it.

And the reason for this is you don't want your advisor to have the ability to just go rogue with your money. Like one day they wake up and they decide, you know what, we want to put all our money in Amazon because Amazon's a super great company. They're doing all these amazing things. So we're going to put a bunch of money in Amazon today.

you don't want them to have that ability. And it may not be that extreme. It might be like, you know what? We love international stocks right now. And we're going to take most of your stocks and we're going to put it all in international stocks and take it out of the US. And so they might start to make more macro changes like that, that again, isn't really what you signed up for and probably not in your best interest. So

If you hire a financial advisor, make sure that they're going through this process of putting together an investment policy statement. And it might be as simple as just shooting them an email and saying, hey, do we have an investment policy statement in place for my accounts with you? And you might very well have put one together and just didn't know that that's what it was. So

It would not hurt to ask if there isn't one in place, work with them to put one in place. You can use our template. You can Google around. There's a bunch of templates online or the firm that they work for might very well have one to use. So,

Even if you have a financial advisor, make sure there's an IPS in place. And again, if you're a do-it-yourself investor, you're not off the hook here. You want this piece of paper between you and your money so that you stay the course. You're investing your money in the markets to grow.

You don't want to make these big irrational mistakes when you're bored on a Wednesday and you have nothing better to do and you log into Schwab or Fidelity or TD Ameritrade and all these things are blinking and these cool ads start to pop up and you start trading things around. That's not going to get you to where you need to be. That's not going to help you accomplish your goals.

If you kind of have that itch to start making changes to your portfolio, I'd say your first step would be to go reach for that investment policy statement and not your computer to go log in and start trading. Pull out that IPS and read it and say, does this still line up with my intentions, with my goals behind investing? Is this still my investment objective? Do I still have the same risk tolerance?

If things have changed in your financial life, if your financial plan has changed, if your retirement plan has changed, then maybe your IPS needs to change. So before you make changes to your portfolios, you first want to make changes to your IPS. And before making changes to your IPS, you should probably make the appropriate changes to your financial plan.

So all those things are all interconnected, but sometimes people like to put the cart before the horse. Trading stocks and bonds maybe sounds a little more fun than updating their financial plan, but that's where you can get in trouble. So again, keep it simple. Put a one pager together with the variables that I discussed and that you'll find in the template.

And that'll just be kind of your buffer between you and your money. And when you have that itch to trade, pull out that IPS, say, hey, does this still line up with what I'm trying to do? If yes, then maybe you don't have to do anything. Maybe you just leave your portfolio alone and you can just kind of check it off your list and say, hey, I checked on my accounts and everything is still lined up how I want it and we're good to go.

You know, think about all the temptations around us. I mean, the media is just all on our face these days. And, you know, you've got Twitter and LinkedIn and CNBC and emails. You know, think back to like the tech bubble in the late 90s where, you know, everybody was putting their money in tech stocks and everyone was making money for a short period of time. And it's

If you had an investment policy statement in place, you probably wouldn't or shouldn't have put a bunch of money in tech stocks because you would have pulled out your IPS. That would have guided your investment decisions. And the IPS surely would never say, go put all your money into one sector. That just should not...

Your IPS should never say that. So if you had a correct, well thought out investment policy statement, it would have said, no, this is your investment objective. This is your tolerance for risk. These are your income needs. This is your desired asset allocation. Putting money in tech stocks does not align with your IPS.

Same with if you have a financial advisor, if that IPS is in place, they can't be tempted by the other brokers in the office who are all buying tech stocks for their clients. That IPS would tell them, no, that's not the objective of this client and I can't and won't do that.

So in conclusion, in short, an investment policy statement will serve as this voice of reason when you're tempted to invest in risky or currently trending investments.

If you're a listener of the show, you've listened to other episodes, you might have heard us talk about cowboy accounts. And these cowboy accounts is where you can scratch that itch, right? You can go and buy tech stocks or buy Amazon, go buy some Bitcoin, whatever it might be that's trending or you're interested in. Use that cowboy account, which should be less than 5% of your investable assets and go play with your stuff there.

but the other 95% of your wealth should have and be guided by an investment policy statement to keep you out of trouble. If you create this document

and you rely on everything that's in it for the long term, I promise you that you're going to be in a better place 10, 15, 20 years from now. So go put one into place. And maybe the last thing I'll just say is I kind of alluded to it a few minutes ago, but

This is not a static document. This document can certainly change. So review it at least every year. Make sure it still makes sense. You can always update it and change it. Just remember that your financial plan, something in your financial plan should change first.

which would trigger your IPS to change, which would then trigger your investments to change. So make sure that you're following kind of that order of operations and not jumping ahead. So hopefully that was helpful to you today. Again, go to youstaywealthy.com slash 37, because this is episode 37. You'll find a bunch of resources there.

Really quick before we close out today, I've got two listener questions, two really good questions that actually come up a lot. So thank you. Thank you for emailing me. If you do have any questions, shoot me an email at taylor at youstaywealthy.com. I read and respond to every email, even if I don't read the question on air. So please shoot me an email. I've really had a lot of fun engaging with a lot of you and it's what keeps me going here. So please engage. Okay, our first question is,

I started taking social security early thinking that I would use this money to travel during retirement while I'm still healthy. This would prevent me from having to touch my retirement accounts. Is this the right choice? I continue to read so many articles about the benefits of delaying social security.

Okay, so this is a really good question. So she thought that she'd like to do some traveling in retirement, and she's afraid to kind of touch her long-term savings, her retirement accounts that she worked so hard to build up. And so she thought, you know, why don't I just use my Social Security paycheck to fund my travel? I can use that and let my investments and retirement accounts grow.

And so I think she's got the right thinking here where she's starting to draw from different buckets and start to kind of try to create a withdrawal strategy. But there's a couple issues here. I mean, number one, delaying Social Security to age 70 is the right answer for most people. Everybody's different. You have unique situations. But for most people, delaying Social Security to age 70 is the right answer.

And here's how I might approach this woman's situation. I might have her go ahead and delay social security to age 70, and she can still travel just as much as she had planned on, but I would have her take her travel budget from a different account. Now, it would depend on what account she has available, but we would take it from the right account to mitigate taxes. We don't want her to get hit with a

And let's say she wants to spend $20,000 a year on travel. We would take that $20,000 from the appropriate bucket and she can go and travel and do everything that she had planned on doing. But we're going to let Social Security delay because...

Because on average, Social Security grows about 8% each year the longer you wait. So she's going to get an 8% larger paycheck for every year she waits. It's pretty hard these days to get a guaranteed 8%. Well, it's impossible to get an 8% guaranteed rate of return. So go ahead and let the Social Security office give you that rate of return on that bucket of money. We'll go ahead and spend this other bucket while we delay.

So, you know, she had just kind of thought that she wouldn't be able to travel as much if she didn't do this strategy by spending social security. But I would just kind of reframe it and say, you can, you can still do that as long as it lines up with her financial plan and, you know, isn't going to jeopardize her retirement, but you can still travel and do all that. Let's just take it from a different bucket, a better bucket and kind of optimize your travel goal.

So really good question. Again, Delane is the right answer for most people. But again, it really depends on your situation. So you may need to dig a little deeper or ask a financial planner.

Second question, he says, I worked so hard to build up my savings during my working years and the recent stock market volatility really has me concerned. I live within my means and have some rental real estate that helps supplement my income. I'm starting to wonder if I even need to invest this money in the markets or if I can just put this in cash and not have to worry anymore.

So really good question. In short, this gentleman really has enough money. He's done a great job saving. He's got other income sources. He's looking at everything and saying, I have plenty of money. Like I'm never going to spend this money. Why do I have it invested in stocks and bonds? It's keeping me up at night. You know, the news is in my face, the political and economic climate, all this stuff. He's like, I feel like I could just simplify my life and

and just put it all in cash and call it a day. And that may be the right answer for him. It may be, but there's a few things that he may want to think through. Number one is inflation. And we've talked about this before, but the reason why we invest our money, the reason why we don't put our money under the mattress is because that little thing called inflation. A dollar tomorrow is not the same as a dollar today.

So we want to invest our money in the markets to keep up with inflation. So if a gallon of milk is five bucks today and it's eight bucks in a few years, our money is growing along with that and we're not being eroded by inflation. If you just put all your money under the mattress or in cash, you're pretty much guaranteeing that you're going to lose money every single day.

If you're okay with that and you've got plenty of money and it really doesn't matter and you care more about getting good sleep at night, then maybe that's the right answer for you. But just remember how crazy inflation can get. Everybody remembers decades ago when inflation was out of control. There's nothing to say that that can't happen again. So keep that in mind. Number two that this gentleman might want to think about –

things could change. Your goals could change. If you don't have grandkids today, maybe you have grandkids tomorrow and you want to help with their college education or help them start a business or help them buy a home. Or maybe you all of a sudden get this itch to start traveling and your financial goals start to change and putting all your money in cash doesn't support or align with some of those new goals.

And so putting your money in cash under the mattress, not growing, all of a sudden you wake up in five or 10 years and you're like, Hey, I want to do all this stuff. I wish I had been investing my money and I wish I had grown a little bit and kept up with inflation. So just think about kind of where you're at today and, and some of the possibilities of, of tomorrow, like what other things, you know, might you want to do in the future? Yeah.

And then lastly, and this kind of goes on my second point, most people that have accumulated enough wealth, enough money to get them through retirement, they're not really at risk for running out of money. Just like this gentleman is like, I'm fine. I live within my means. I'm good. I don't need to reach for 6% returns or 7% returns.

Most people in this situation have a charitable giving goal. They have so much money, they're never going to spend it. They want to give it away. Maybe they want to give it away to their family. Maybe they want to give it away to a nonprofit, or maybe they want to do both. But start to think about these buckets of money and maybe not investing it for yourself, but maybe investing it for yourself.

other people. Again, maybe family, maybe a nonprofit. So maybe you don't want to give away this million dollars you have saved over here. Maybe you don't want to just write somebody a check today, but maybe when your life ends, you want that bucket of money to go towards XYZ nonprofit.

So think about it from their point of view. They would prefer for you to invest that money and grow it significantly over the next 10, 20, 30 years because they're going to end up with more money. If that million dollars just sits in cash,

Million dollars today, again, is not a million dollars 30 years from now. They would love, love, love for you to invest that money aggressively over the next 20, 30 years and turn that million into 2 million or 3 million. They're really going to benefit more from it.

So again, maybe that's a nonprofit, maybe that's family. But think about it from someone else's point of view or kind of who's going to end up with that money and invest it on their behalf and kind of take it out of your financial plan. And that's where starting to create kind of different buckets and different investment policy statements for each investment account can really start to benefit you and keep you on track. And then lastly, maybe I'll just say,

Maybe you're just simply invested too aggressively. You know, some people think that the traditional 60-40 portfolio, 60% stocks, 40% bonds, you know, a lot of people just assume that's the right mix because that's, you know, what this article I read said that if you're retired, invest in a 60-40. But maybe that's just too much risk for you. And

Maybe you need to flip-flop that. Maybe you need 40% in stocks and 60% in bonds, and you just need a more conservative, more palatable portfolio that isn't going to grow as much, but it's still invested above and beyond cash, and there's still a goal of beating inflation there. So maybe going through this investment policy statement process would be helpful to you to make sure that you're in the right place and in the right portfolio.

So hope that was helpful for you guys today. If you have any suggestions, feedback, comments, again, shoot me an email at taylor at youstaywealthy.com. Yes, we did change the domain name for the podcast. We started to realize that we've got a much wider audience than just here in San Diego. So we've kind of rebranded the podcast. We've called it the Stay Wealthy Podcast.

And the new domain is youstaywealthy.com. And so it's allowing us to kind of reach a larger audience outside of just San Diego and Southern California. So thank you all for your support. Again, shoot me an email, please. Questions, comments, I'll take it all. And I will talk to you guys in two weeks.

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