Day #177: My Investment Policy Statement

So here it is, the finished masterpiece. I have already made several changes just in the two months or so that I have been working on this and I’m sure there are many changes still to come. Now, this statement fits my preferences and needs and wouldn’t necessarily work for everyone. I share it simply because I thought it might be nice for you to see what one looks like. The important thing to realize is that investing shouldn’t be done haphazardly. It takes considerable thought and careful planning and it wouldn’t be a bad idea to consult with an expert for advice.

Executive Summary

Current Value: My current portfolio is in all cash with a total value in the low four-figure range.

Contributions: I do not intend to make additional contributions to my portfolio this year.

Investment Horizon: I intend to invest at least until I reach retirement age. That gives me an investment horizon of 23 years.

Expected Return: I am expecting a 10% return.

Loss Limits: If any one position loses 7%, I will close that position immediately regardless of how long I have held the position.

Asset Allocation:

Stocks: 64% (27% large, 15% medium, 10% small and 12% foreign)

Bonds: 13%

Cash: 23%


Large stocks: S&P 500 Index

Medium stocks: Russell Mid-Cap Index

Small stocks: Russell 2000 Index

Foreign stocks: MSCI EAFE Index

Bonds: Barclays U.S. Aggregate Bond Index

Investment Objective

These funds are earmarked for a second home to be purchased prior to when my spouse and I reach retirement age.

Investment Philosophy

I wish to minimize the overall riskiness of my portfolio while achieving my performance benchmarks. The overall riskiness of my portfolio should be no more risky than the broad stock market (as measured by the standard deviation of S&P 500 returns).


I will put 80% of my holdings in core investments and 20% in noncore investments.


I will maintain a portfolio of mutual funds.


With respect to trading, I am generally a ‘buy and hold’ investor and therefore hope to trade as little as possible. I intend to hold my positions for as long as possible, and can be classified as a ‘position trader’.

My philosophy regarding trading revolves around three key areas:

1. Buying: I’ll use limit orders to specify the prices that I am willing to pay (or receive if I am short selling). I will use limit orders to make my purchases unless I am buying mutual funds because their prices are based on end-of-day valuations. For stocks, I will set my price (my limit price) as the most I am willing to pay. This will be the price that I used in my analysis.

2. Limiting Losses: To limit losses, I will use a ‘stop’ order. With these orders, my order will become ‘live’ as soon as the current price drops below my 7% ‘trigger’ price.

3. Position Sizing: I will limit my overall exposure to one position to 1% of my portfolio value. I will do this by calculating my position sizes for long positions as (Portfolio Value x 1%)/(Unit Price x 7%).

Investment Selection Criteria

I will screen my stocks based on the following criteria:

Price – I will only purchase stocks that are trading for at least $5 per share but no more than 2/3 of their true value.

Return on Equity – I will only invest in firms with an ROE of 15% or more.

Forecasted Earnings Growth Rate – I will only invest in firms with projected earnings growth of at least 7% per year.

Leverage – I will only invest in firms whose debt-to-equity ratio is less than 1.

Dividend Yield – I will only invest in firms whose dividend yield is at least two-thirds of the long-term AAA bond yield.

Market Capitalization – I am going to avoid micro and nano-cap stocks (market cap under $300 million) altogether. I will use small and mid-cap stocks (market cap between $300 million and $10 billion) for the non-core portion of my portfolio and large and mega-cap stocks (market cap over $10 billion) for the core portion of my portfolio.

Price/Earnings Ratio – I will only invest in firms whose P/E ratio is lower than the P/E ratio of the S&P 500.


I will review my portfolio at the beginning of each month.

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