TT23 – Investment Policy: Individual Investor
5574030-569595Grade:_/1500Grade:_/15XI. Investment Plan Investment Plan Template (LT5A)Your NamePersonal Financial PlanClass and DateNOTE: If it seems like this Investment Plan has a lot of financial jargon, it does. There is a standard format to industry Investment Policy Statements (IPS), and I have tried to follow that format (with a few adjustments). Moreover, there are key areas of all IPSs, and I have included those areas. They are included for the sole purpose of helping you not make financial mistakes that could cost you dearly. Copy this file, and then fill in the blanks (__) with your own personal information, including types of accounts, stages in life, asset allocation targets, benchmarks, etc. Please delete the comments and paragraphs that have a box around them after you are done with this Investment Plan. Boxed paragraphs are information to help you prepare your Investment Plan only. They are not part of the Investment Plan. For information on how to fill this out, use Investment Plan Example Instructions (LT5B) and Investment Plan 20 Questions Worksheet (LT5C). In addition, Investment Plan Template Labeled (LT5F) is color coded to show which sections of the Plan are covered in which chapters. These should help you understand how and why it is so important to create, have and follow an Investment Plan.I. Introduction and PurposeA. Introduction. This Investment Plan, also called an Investment Policy Statement or IPS, serves as the framework for the Investment Management Team of _(your name and spouse if married or your name if single)_, as constructed by _(your name and spouse if married or your name if single)_ on _(date)_, 201_. _(Your name)_ is currently _(25)_ years old _(_(and your spouse’s name)_ is _(24)_ years old)_. B. Purpose. This Plan describes in detail how the assets of the Team are to be managed and invested, consistent with the Team’s Personal Financial Plan section II. Vision, Goals and Plans and section XII. Retirement Planning. This Investment Plan acknowledges the Risk and Return Objectives of the Team; discusses the Constraints and Guidelines they will follow; describes the specific Investment Policy used; and covers the ongoing Evaluation and Modification that will occur. C. Principles. This is a principles-based Investment Plan, based on understanding the investment Team, including their vision, goals, plans, budget and tolerance for risk; understanding their savings, investment, retirement, education, mission and giving vision and goals; and using principles-based investing to accomplish those goals. Key principles include:Understanding and managing risk Being diversified at all timesInvesting low-cost and tax efficiently Investing long-termKnowing what they invest inMonitoring portfolio performance Not trying to beat the market, and Working only with high-quality individuals and institutions. II. Investment Goals and ObjectivesThis section details the Plan’s investment vehicles, time frames, and the risk and return objectives.A. Objectives. The objective of this Investment Plan is to help the Team understand their vision, set goals and plans to accomplish that vision, understand constraints, and share information as necessary with others.B. Investment vehicles. The Investment Plan proposes the creation and use of multiple sub-accounts to accomplish that vision. These include taxable accounts, including _(bank, brokerage and mutual funds accounts)_; retirement accounts, including _(401ks/Roth 401ks)_, _(IRA/Roth IRAs)_, _(SEP IRA/SIMPLE Plans)_; education accounts, including __(Education IRAs)_, _(college 529 Savings Plans)_, _(US Savings bonds)_; and mission accounts, including _(mutual fund, bank, brokerage, and custodial accounts)_. Retirement, mission and education accounts and goals are discussed in the vision and goals, retirement and family sections of the Team’s PFP. The Team follows the “free money,” “tax-advantaged money,” and “tax efficient and wise investing” framework in selecting investment vehicles.C. Time-frames. This Plan supposes two distinct time frames from which to view the Team’s investment objectives. Stage 1 is between now and the Investment Team’s _(55th)_ birthday, is expected to last _(30)_ years and is considered the time before retirement. Stage 2 is between the Team’s _(56th)_ and _(91st)_ birthday, is expected to last _(30)_ years and is considered the period during retirement. D. Returns. The Team are not full-time investment professionals. Their return objective is to make a return consistent with the return on a diversified portfolio of acceptable asset classes and assets, which consist mainly of the return on portfolios of mutual funds that follow stocks, bonds, and cash, consistent with the asset allocation targets discussed in Section IV.C.1 and IV.C.2.1. Stage 1. The Team is seeking a _(6.5%)_return, net of fees for Stage 1. This return is consistent with the historical average of the following portfolio (see Exhibit 1: Expected Return Simulation and Benchmarks (LT27):A _(25% US bond portfolio)_, as measured by _(the Barclays Aggregate Bond Index)_; a _(50% US large cap portfolio)_, as measured by the _(S&P 500)_index; a _(20% international portfolio)_, as measure by the _(EAFE Index)_; and a _(5% US REIT portfolio)_, as measured by the _(S&P REIT Index)_. To get an idea of your expected return using historical data and your proposed asset allocation, use Expected Return Simulation and Benchmarks (LT27) and include this as Exhibit 1. With this simulation, you can selectively pick the years over which you calculate the expected returns, i.e., 1, 5, 10, 25, 50 or 90 years. If your simulation shows an expected return greater than 7.0%, please use a more conservative estimate of between 6-7% for Stage 1 and 5-6% for Stage 2. 2. Stage 2. The Team is seeking a _(5.5%)_return, net of fees, for Stage 2. This return is consistent with the historical average of the following portfolio:A _(45% US bond portfolio)_, as measured by _(the Barclays Aggregate Bond Index)_; a _(30% US large cap portfolio)_, as measured by the _(S&P 500)_index; a _(20% international portfolio)_, as measure by _(EAFE index)_; and a _(5% US REIT portfolio)_, as measured by the _(S&P REIT Index)_. E. Risk. From a risk perspective, the Investment Team are _(very conservative, conservative, moderate, aggressive, very aggressive_) investors. Consistent with their return objectives, the Team accepts the risk of its weighted benchmarks in both Stage 1 and Stage 2. To get the type of investor you are, use A Risk Tolerance Test (LT16) or other available risk tolerance tests. Ours is just one of many different risk tests.1. Stage 1. The Team is comfortable with the risk of the weighted benchmark during Stage 1, which is:A _(25% US bond portfolio)_, as measured by _(the Barclays Aggregate Bond Index)_; a _(50% US large cap portfolio)_, as measured by the _(S&P 500)_index; a _(20% international portfolio)_, as measure by _(EAFE Index)_; and a _(5% US REIT portfolio)_, as measured by the _(S&P REIT Index)_. This allocation is your acceptable risk and is the same as II.D.1.2. Stage 2. The Team is also comfortable with the risk of the weighted benchmark during Stage 2, which is:A _(45% US bond portfolio)_, as measured by _(the Barclays Aggregate Bond Index)_; a _(30% US large cap portfolio)_, as measured by the _(S&P 500)_index; a _(20% international portfolio)_, as measure by _(EAFE Index)_; and a _(5% US REIT portfolio)_, as measured by the _(S&P REIT Index)_. This allocation is your acceptable risk and is the same as II.D.2. III. Investment Guidelines and ConstraintsInvestment guidelines and constraints covers specific items that are unique to this Investment Team and relate to the specific goals and objectives of the Team. These are covered in detail in the “Vision and Goals” section of the PFP.A. Guidelines. The Team follows a principles-based approach to investing, discussed in I.C. above. 1. Stage 1. During Stage 1, management of accounts during this period will be for _(capital appreciation and the growth of assets)_. The majority of the assets invested during this stage should be considered long-term assets, and will likely not be needed for many years. Exceptions to this are the likely purchase of a home _(in __ years)_ or when the children leave for college or missions, which is likely to begin in year _(date)_. 2. Stage 2. During Stage 2, management of accounts during this period will be mainly for _(income generation and capital preservation)_ with a secondary goal of _(building assets)_ that will allow the Investment Team to _(_enjoy retirement_, _go on missions_, _prepare for increased health costs_, _pass on to their heirs assets consistent with the Investment Team’s long-term goals and values_)_. Major funding needs during this Stage are likely to be for _(_missions_, _financial aid for grandkid’s missions and education_, _funding for travel_, _other reasons_)_. B. Constraints. Key constraints for the Investment Team based on their specific needs are liquidity, time horizon, taxes, and special needs. 1. Liquidity: Liquidity constraints are likely for _(_purchase of a home_, _education and missions for the children_, _missions_, _travel_)_when retired. These goals should be planned for in the Investment account. Constraints will vary depending on the account type. Key liquidity concerns will be for _(graduate school in __ years, _a home purchase in __ years_, _mission and education spending in __ years_)_. At no point in time with the Team’s Emergency Fund be less than _(3-6 months’ income)_.2. Time horizon: Time constraints will vary depending on account type. Assets invested in taxable accounts will have a _(40)_ year time horizon, except for the portion used _(for the purchase of their first home)_, _(for funding graduate school)_, or _(for other purposes)_. Assets invested in retirement accounts, i.e., _(401k, IRA, Roth IRA, and retirement plans)_will have a minimum of a _(30)_ year time horizon or until retirement. Assets invested in education and mission accounts the _(Education IRA, 529 Savings Plans)_will have a minimum time horizon of _(15)_ years _(considering the Team’s oldest child is _(5)_ years old and will be going to college at age _(17)_. Assets invested in the Investment account and custodial accounts will have a _(shorter)_time horizon, as these will be used to _(graduate school, purchase of a home, send the children on missions, educate children, etc.)_.3. Taxes: Taxes should be taken into account when considering the most attractive assets to purchase. The Team is in the _(15%)_ marginal federal tax bracket and in the _(7%)_ marginal _(Utah)_ state tax bracket of _(filing singly, married filing jointly)_. The Team’s average tax rate on _(taxable income, AGI)_ is _(__%)_Marginal and average tax rates should come from your Tax Section of your financial plan.4. Unique needs: Constraints are constraints unique to the investment team including _(_special needs children_, _desires to help through charitable gifts_, etc.)_.IV. Investment Policies, Plans and StrategiesInvestment policy covers how the portfolios will be managed, and include acceptable and unacceptable asset classes, investment benchmarks, asset allocation strategy, investment strategy, funding strategy, and new investment strategy. A. Acceptable investments. Initially, the Investment Team will invest in mutual funds, index funds, and ETFs, which invest in bonds and cash, stocks, and other asset classes. The Investment Team will invest in _(no-load mutual funds)_, with an emphasis on funds that have _(_no-loads_, _low management fees_, _low turnover_, and _cost minimization_)_. 1. Acceptable Asset Classes. Acceptable asset classes and assets include the followinga. Bonds and Cash. The portfolios will contain bond mutual funds, bond index funds and bonds including _(_corporate bonds_, _Treasury bonds_, and _municipal bonds_)_, particularly as the Team’s tax bracket rises. The Team will also likely invest in cash funds as well. Cash will usually mean _(_money market funds_, _short-term commercial paper_, and _other short-term debt instruments_)_. Initially, the bonds and bond mutual funds and cash allocation will be considered the Team’s Emergency Fund.b. Stocks. The portfolios will include stock mutual funds, stock index funds, and stocks including _(_US stocks_, _ADRs_, _international stocks_, and _emerging market stocks_)_. These stock funds will be managed in a diversified manner, spread across countries, industries and companies. c. Other Assets. Portfolios may also include other assets, which would typically mean _(_Real Estate Investment Trusts (REITS)_, _gold mutual funds_)_, which, in an asset class sense, are not viewed as "stocks" because of their unique nature.2. Unacceptable Asset Classes. The Team will not invest in asset classes or assets where the Team has no discernable specific advantage, i.e. _(_derivatives_, _collectibles_, _foreign currencies_, _options_, _futures_, etc.)_. 3. Debt. The Team will not invest in activities that require debt, i.e., the borrowing of cash or securities, such as buying on margin or short selling, as these add significant risk to the portfolio. Leverage will not be used in the portfolio.B. Investment Benchmarks. The Investment Team’s investment benchmarks are:1. Stage 1. The weighted investment benchmark for Stage 1 is:A _(25% US bond portfolio)_, as measured by _(the Barclays Aggregate Bond Index)_; a _(50% US large cap portfolio)_, as measured by the _(S&P 500)_index; a _(20% international portfolio)_, as measure by _(EAFE Index)_; and a _(5% US REIT portfolio)_, as measured by the _(S&P REIT Index)_. 2. Stage 2. The weighted investment benchmark for Stage 2 is:A _(45% US bond portfolio)_, as measured by _(the Barclays Aggregate Bond Index)_; a _(30% US large cap portfolio)_, as measured by the _(S&P 500)_index; a _(20% international portfolio)_, as measure by _(EAFE Index)_; and a _(5% US REIT portfolio)_, as measured by the _(S&P REIT Index)_. These benchmarks are the same as in section II.D.1 and II.D.2 and can be copied directly.C. Asset Allocation Strategy. Asset allocation is the key determinant of returns. As such, the following are target, minimum, and maximum allocations for each of the asset classes by stage. We include minimum and maximum allocations to limit turnover in the portfolios.1. Stage 1. Until retirement, assets are invested mainly for appreciation. They will be managed for _(stable growth, growth, aggressive growth)_, with a goal of maximizing after-tax returns. The portfolios will have the following targets:TargetMinimumMaximumEquities/US & Intl:70%60%80%Bonds and Cash:25%15%35%Other (REITs): 5% 0% 5%These targets should be consistent with the return and risk targets from II.E.1. Since REITs are neither equities nor bonds, we include them in the “Other” category. 2. Stage 2. After retirement, the asset allocation will be as follows:TargetMinimumMaximumEquities/ US & Intl:50%30%60%Bonds and Cash:45%35%65%Other (REITs):5%0%10%These targets should be consistent with the return and risk targets from II.E.2.D. Investment Strategy. The Investment Team are not full-time investment professionals. As such, they have the following investment strategy. 1. Active versus passive. The Team’s investment strategy is a blend of _(_active_, _passive_, _active and passive management_)_. Approximately _(50-70%)_of the Account assets will be managed in a _(passive strategy)_, with an emphasis on _(very low-cost indexing)_. The remaining _(30-50%)_will be invested in assets that have a _(proven record of adding value over and above the stated benchmarks)_. Assets will be invested to _(_minimize current taxes_, _realize long-term capital gains_, and _to defer, as much as possible, long-term capital gains until retirement_)_. 2. Individual Assets. While trading in individual assets is not recommended, after the total portfolio exceeds a threshold amount of _(_$750,000_)_, the Team may invest in individual assets. Should the Team want to be more active in its trading strategy, this will be done through tax-deferred or retirement, rather than taxable accounts. In this manner, the overall portfolio will not be impacted by taxes resulting from increased turnover.3. New Investments. Key for the Investment Team is to maintain a diversified portfolio that will aid in the achievement of the Team’s personal vision and goals. These will include:a. New Investments. The Team will invest not more than _(7.5%)_of the total portfolio amount in any new or individual asset or investment. Index funds, mutual funds and ETFs do not fall under this category unless they have portfolios with less than _(50)_ assets.b. Investments in Company Stock. The Team will ensure that at no time will the investments in company stock in the Team’s retirement plan (401k, 403b, 457 Plan) account for more than _(10%)_of the Team’s total retirement assets.c. Unlisted Investments. If the Team decides to invest in assets not listed on recognized stock exchanges (and the professor recommends against this), this allocation will be limited to _(2.5%)_ of the total portfolio amount (0% recommended). 4. Current Investment Strategy. Currently the Investment Team is in Stage 1 of the investment process. The investments and allocations for this Stage are listed in Exhibit 2: Investment Process Worksheet (LT13). These include for each asset, the asset class, benchmarks, and financial asset that will give exposure to the asset class. The Team has reviewed the specific assets that have been invested in and have ensured they are acceptable by reviewing each assets category, size, diversification, costs, tax efficiency, turnover, un-invested cash, style drift, tracking error, performance, and other factors from the Mutual Fund Selection Worksheet (LT7B). 5. Tax Strategy. The Team will utilize retirement vehicles that diversify taxes, i.e., they will not all be taxed the same time. A rough goal will be to have _(40%)_ in tax-deferred vehicles (i.e., traditional 401k, IRA, SEP-IRA, etc.), _(30%)_ in taxable assets (i.e., taxable brokerage and bank accounts, etc.), and _(30%)_ in tax eliminated accounts (i.e., Roth 401k, Roth IRA, etc.). With these targets, the Team has targeted a Federal tax rate of _(12%)_ in retirement. E. Funding Strategy. Funding of accounts will be consistent with the “priority of money” discussed in the Personal Finance class, namely, first, free money; second, tax advantaged money; and third, tax efficient and wise investing.The Investment Team will fund the above strategy through _(_monthly/weekly direct deposits to their retirement plans_, _monthly/weekly direct deposits to their investment accounts_)_. The Team has a goal to pay the Lord first (_10% plus other offerings_), the Team second, _(10-20%)_, and then to budget and live on the remainder. This account should grow, consistent with a _(20%)_ gross allocation of the Team’s salary each month.V. Investment Monitoring, Rebalancing and AccountabilityInvestment monitoring and evaluation covers how the portfolios will be monitored and evaluated, including portfolio monitoring and reporting, portfolio rebalancing, and portfolio communication.A. Monitoring. The portfolio will be monitored _(weekly/monthly/quarterly)_, or more often as the need requires. 1. Portfolio monitoring method. The Portfolio will be reviewed weekly in a meeting held with the Investment Team on _(day of the week)_ at _(time)_ (a.m./p.m.)_) to discuss financial matters including budgets, cost reduction, other topics, and the portfolio. This is the most critical financial meeting of the Investment Management Team.B. Rebalancing. The portfolio will be rebalanced on a _( _annual_, _two-year_, _as needed_)_ basis. Rebalancing will attempt to _(minimize transactions costs and turnover)_ through using _(_new money to rebalance portfolios_ and by using _charitable donations of appreciated assets to reallocate assets between asset classes_)_. _(Cost and tax minimization)_ remains a key area during rebalancing during stages 1 and 2. 1. Portfolio rebalancing method. The portfolio will be rebalanced using _(_periodic-based_, _range-based_)_ rebalancing.C. Accountability. _(Your name)_will ensure good communication in several ways: the Investment Team will receive trade confirmations as they happen; a monthly statement from the custodian; and write an annual report. Success will be measured by _(the achievement of the Goals and Objectives)_, as stated above.1. Portfolio accountability method. In addition to the weekly monitoring, the Investment Team will review performance annually to ensure investment performance is consistent with plans. Investments are evaluated on a rolling _(12, 24, or 36)_ month basis.D. Plan Revisions. This Investment Plan may be modified at any time by mutual consent of the Investment Team based on changes in Team’s objectives or circumstances. The amount of the monthly deposit to the _(401k, retirement, and investment)_ account(s) will also be evaluated from time to time, but at no point will fall below the _(_10-20%_) recommended goal. E. Team Signatures:Signed: _____________________ Date: ___________Signed: _____________________ Date: ___________VI. ExhibitsExhibit 1: Expected Return Simulation and Benchmarks (LT27). This details your process in determining your expected return and risk. You only need to include one sheet, generally of your expected return during Stage 1. You will include your target asset allocation in this sheet. Note that your expected return does not have to be the same as what is on LT27, and will likely be less.Exhibit 2: Investment Process Worksheet (LT13). This details your current asset allocation strategy and which assets you will invest. Include your asset allocation before retirement, and include the names of each of the mutual funds you have chosen (these will be in Exhibit 3).Exhibit 3: Financial Asset Pages (Data or Snapshot Pages from Morningstar (preferred) or from other financial websites such as YahooFinance, GoogleFinance, etc.) This details your financial assets which will give you exposure to your chosen asset classes. In determining your financial assets, use Using Morningstar to Select Mutual Funds (LT7) and its Mutual Fund Selection Worksheet (LT7B). Once you select your asset classes and percentages, use the things you learned about choosing mutual funds and the criteria you consider important to select the funds for each of your asset classes. Finally, pick your assets, print off the Snapshot page, and include the printouts of your four assets (minimum) as Exhibit 3: Financial Asset Pages. DisclaimerThe purpose of this material and this class is to help you get your financial house in order and to help you on your road to financial self-reliance. If there are mistakes in this material, please bring them to our attention, and we will correct them in upcoming versions. The teacher, and BYU, specifically disclaim any liability or responsibility for claims, loss, or risk incurred, directly or indirectly, by using this material. Updated 2018-03-06. ................
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