Where to start with investing

An investment policy statement (IPS) is the number one most important piece of paper to have before you start investing, or before you continue investing.  Having this one piece of paper and referring to it often will avoid many of the pitfalls that even the most seasoned investors make.

An investment policy statement is simply a document that describes what your goals are for your money, how long you can part with the funds, what your selection philosophy is, and what sort of risks you are willing to accept.

Investing when driven by emotion is dangerous. It can make you buy a stock that you don’t truly understand, sell a stock because everyone else is selling, or not invest in a great company because Jim Cramer made a sound effect when he last referred to it. An investment policy statement can help you avoid all of these issues.This statement should be proudly displayed in your home office, or work cubicle to remind you of your goals and should be referred to before every buy or sell is executed.  If your actions aren’t going to be consistent with the philosophy in our IPS then something is wrong. Either your IPS needs to be revised, or you have fallen prey to investing with emotions and need to take your finger off the trigger.

An investment policy statement doesn’t have to be a massive document, in fact I would say you should be able to fit it all on one piece of paper. Here are a few potential sub headings you can use to make your own:

• Purpose of Portfolio(s)
• Return Expectations
• Time Horizon
• Financial Stability
• Asset Allocation or Mix
• Investment Philosophy
• Investment Selection Criteria
• Risk Tolerance
• Re-balancing Plan
• Acceptable Investment Vehicles

To help you along in creating your own IPS here is an IPS Sample.