Coffee cup sitting on a book for the Investor Policy Statement post

An investor policy statement (IPS) is a document an investor writes to document how they will invest. Much like a Jedi makes their own light-saber you get to craft your own investor policy statement. This document defines investment goals and describes the strategy that will be used to accomplish the goals. Having an IPS has a grounding effect on my investing. When I am tempted to make a change to my investments I first reconcile the proposed change against my IPS. I ask myself if what I am thinking about doing is in line with my IPS. Should the proposed action and the investor policy statement agree then I do it. If not I put away my itchy mouse finger and move on.

My Investor Policy Statement

Investment objective: Accumulate 25 times annual spending in investments.

Asset Allocation: Buy and hold long term broad market low cost passively managed index funds. Maintain overall 75% stock and 25% fixed income allocation.

Save in this order:

  1. Establish an emergency fund.
  2. Contribute to 401k up to company match.
  3. Maximize HSA contributions.
  4. Fund Traditional IRA to limit.
  5. Fund spousal IRA.
  6. Finish funding 401k.
  7. Invest any additional capital in taxable account.

Not a whole lot to it. It is specific enough to keep me out of trouble. Yet vague enough I don’t have to go editing it too often.

Update: My wife is taking a sabbatical from paid employment so step 5. Fund spousal IRA has been added to the IPS.

Using the IPS when making changes

I was recently considering a change in my Traditional IRA account. I was thinking about transferring shares from VTSMX to VTSAX. Both of those tickers are for the same fund. VTSMX is for the investor shares with a 0.16% expense ratio and a minimum $3k investment. VTSAX has is the admirals share class with an expense ratio of 0.05% and a minimum investment of $10k. I had passed the minimum to qualify for VTSAX some time ago in the tIRA account. I pulled up my IPS and considered the change. Since the change didn’t affect my asset allocation, incurred no fees, and reduced future fees by moving to a fund with a lower expense ratio the proposed change was in line with my IPS.

On another occasion I was considering adding some emerging market exposure to my portfolio. I got caught up in the buzz about the asset class so I started considering it. Then I looked at my IPS. The funds I was considering were not particularly low cost. They were also sector funds so they failed the broad market fund litmus test. I didn’t need a third strike to realize I that what I was considering was not in line with my plan. So I took a deep breath, and moved on. A few months later I experienced some sweet schadenfreude as the emerging markets sector tanked hard.

IPS helps me dodge a 3x leveraged bullet

During the first part of 2015 some of my co-workers started getting excited about UWTI. They hatched a plan of catching the falling knife to make quick dime. Once again I referred to my IPS and nowhere in there does it say to invest in a 3x leveraged commodity futures fund. I wished them clear horizons as they went about their speculative trading. Watching the ticker for UWTI has been like watching a professional limbo competition seeing how low that fund can go. Once again the IPS saved me from myself.

Update: After writing this article UWTI was delisted. Thank you IPS for saving me from myself.

Where debt payoff fits in

I don’t mention paying off debt anywhere in the list above. If I had consumer debt more than ~5% above the 10 year treasury rate I would prioritize paying that debt off between steps 5 and 6. Any debt more than ~3% above the 10 year t-note rate I would slip in between steps 6 and 7. My wife and I just recently finished off paying her grad school loans and those were in that bucket. After paying off that debt I updated the IPS to what is listed above. Now we just have a mortgage. The interest rate on the mortgage is approximately the same as the 10 year t-note so I have prioritized the payoff below step 7. Since step seven says: “Invest any additional capital” leaving nothing for a step eight so I left it off.

At some point I will get tired of carrying the mortgage and will just pay it off. For now the math says that carrying the mortgage and investing the funds that would have been used to pay it off has a higher expected return than paying off the mortgage immediately (As long as I assume securities return approximately 7% in inflation adjusted returns this is true). This strategy does come with a slightly higher risk than just paying off the mortgage (Because securities could return less than 7%). Go figure that Modern Portfolio Theory would go and raise its head again. Either way determining whether to pay off the mortgage early or invest more is a good problem to have.