This week’s assignment is the Investment Policy
An investment policy is a starting point for setting and communicating an objective performance standard that helps guide investment strategy.
If you were to visit a financial advisor, they would start with a session to help you define your investment policy, as this guides the investment strategy they would develop for you.
The investment policy is a reference point that helps an investor compares portfolio performance with the guidelines specified in the policy statement. The investment policy is written in terms of both risk and return. It is important to evaluate one’s risk tolerance before setting investment goals.
For example, when determining risk tolerance, factors such as an individual’s family situation (marital status, number of children, future family plans, etc.) must be considered. Additional factors to consider are age, salary, the amount of cash currently held, health, and current insurance coverage. A person’s return objective can be expressed in terms of an absolute or relative percentage or of a general goal, such as current income, capital appreciation, or capital preservation.
In a two-page paper, develop an investment policy, providing a complete description of the portfolio being constructed (from the first assignment œP1), and the methodology for asset selection, including but not limited to:
- risk tolerance
- return objective
- investment time horizon (or breakdown on subsets of your investments and when they would be needed for major events)
- liquidity needs
- investment limitations (i.e. only socially responsible company stocks, and/or limitations due to employment by a broker or auditor, etc.)
- diversification objectives
Please see http://www.bpadvisors.com/endowments-and-foundations-3-critical-elements-of-a-sound-investment-policy/ and http://www.bobermarkey.com/nonprofit_advisor/nonprofit_advisor_investment_policy_fall_10 for additional investment policy guidance.
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