What is it?

An investment policy is a plan that spells out procedures for managing your investments, considering your personal tolerance for risk and your financial needs and goals. Constructing an investment policy is a preliminary step toward creating and managing an investment portfolio. A policy is normally prepared with the help of a financial planner who will then use that policy to establish specific investment strategies (techniques that maximize or protect your returns, or reduce risk) and select investments.

Assembling information to construct an investment policy

The information that will be used to construct an investment policy should be as specific as possible, because the policy itself and the strategies that implement it will be tailored to your responses. If you are working with a financial planner, he or she may interview you, ask you to complete a series of questionnaires, and/or test you in order to obtain and evaluate information. In general, you will need to answer some or all of the following questions before an investment policy tailored to your needs can be constructed:

What personal financial goals do you have?

What amount of money do you need to accomplish each goal?

Within what time frame do you need to achieve each goal?

How would you prioritize your goals?

What is your tolerance for risk?

What cash flow/liquidity needs do you have?

What tax concerns do you have?

What tax bracket are you in?

What financial resources/assets do you currently hold that can be used to fulfill your goals?

Information included in an investment policy

Although there is no standard format for an investment policy, it normally includes some or all of the following information:

Your tolerance for risk

Your investment objectives

In general, the type of investment procedures that will be utilized

How investments will be selected and generally allocated

The rate of return you expect to receive on your investments

How investment performance will be measured

Your time frames for the investments

Tip:   An investment policy does not normally name specific investments or strategies to be used; rather, it describes your attitude toward investing and contains guidelines that can be used later to create and manage an investment portfolio that is right for you.

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