Day #178: IPS Revisions

It hasn’t even been 24 hours since I finalized my Investment Policy Statement (IPS) and I’m already revising it. I’m not bothered by that. Instead, I’m happy that I’m using the document as a guide and didn’t just go through the exercise of drafting it for show.

Today, I thought I would begin looking for securities to put in my portfolio. I don’t want to make any purchases before the New Year because it will only make extra work when filing taxes for no good reason. As I reviewed my IPS from a practical perspective, I saw a few things that I had overlooked before. First, I had indicated that I wanted to take a core/non-core approach to my portfolio where 80% of my portfolio is in core (high quality, stable) investments and 20% is in non-core (more aggressive) investments. However, my asset allocation breakdown didn’t account for this in any way. Instead, my asset allocation simply notes that my portfolio will be divided 64/13 stocks and bonds with the remainder in cash. To account for my core/non-core strategy, I’ll just note that 80% of my stock investments will be in large companies and the rest will be in small and medium-sized firms.

The other big miss I found in my IPS was that I didn’t note any selection criteria for the bonds. Given that the minimum face value on a bond is typically $1,000, given the size of my portfolio, it may not make sense for me to invest in individual bonds. Instead, it might make more sense to consider bond funds. I first considered bond mutual funds, but meeting the minimum investment requirements for most mutual funds made those a difficult choice for me also. I decided, then, to use bond exchange traded funds (ETFs) to complete the bond portion of my portfolio. The nice thing about ETFs is that there aren’t many so the research isn’t as time consuming as it is for stocks or mutual funds. In fact, there are about 1,000 ETFs which is a fairly small number compared to the nearly 10,000 mutual funds on the market. With such a small universe to work with, security selection is fairly simple. Narrowing down the list of ETFs to bond ETFs cuts the list down to less than 30 choices. Matching the term of the bonds to my own investment horizon reduces this list even further and from there, I can review the funds individually and pick the one that suits me best.

Patience is a Virtue
With these revisions in place, I was able to identify a few securities that meet my criteria that I will likely purchase next week. What I have found is that it may be more difficult than I expected to find enough securities that meet my criteria. What I have to remember is to be patient and stick to my policy. I shouldn’t lower my standards just because I want to make a purchase. If I can’t find anything, it may mean that now is not the right time to buy. I’ll follow the securities I have identified on paper for the rest of the week and take the plunge next week. I feel like such a grown-up!

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