What is my Investment Policy Statement?


All ProsperiTea Planning and Tea T.I.M.E. clients get an Investment Policy Statement (“IPS”) . It establishes what asset allocation we agree is appropriate for the client’s risk tolerance and risk capacity. We create individualized target portfolios that considers what you have already and where you have it, as well as how to get the highest return for the lowest risk. Or, to put it another way, how to have the least risk for the highest possible return.

The real value of having an IPS is when the markets get exciting. That’s when actual humans want to do the exact wrong thing: buy high when things are going up, or sell low when things are going down. An IPS says, “in a cold sober moment we decided we wanted an allocation of XX/YY/ZZ, so if that gets out of whack we’ll sell the thing that grew too high and buy some of the stuff that is in the dumps.” Voila, a bit of pruning and backfilling in and you’ve made a lovely garden.

We don’t change the IPS for exogenous risk, meaning, risk from outside your life. Modern Portfolio Theory, upon which this is based, incorporates into the theory a Great Depression, a World War, a nuclear attack, the Dot Com Bubble, The Great Recession… it ASSUMES crap is going to happen. We’d be 100% in stocks if we didn’t think thing would go south sometimes. So when the stock market gets scary – which it will – this just tells you to hold the course.

We change it, however, for endogenous risk, meaning, something has changed in your own life. An illness that shortens the time frame for when you’ll need the money, or a new job that pushes it off.

My basic investment principles are:

  • The wisest way to control risk and enhance return is through diversification across a number of different asset classes that are somewhat uncorrelated with each other.

  • Asset location is considered, with the goal of putting bonds and REITS in tax-deferred assets preferentially. This matches the tax treatment of those types of income the best.

  • Funds needed imminently shall be kept “bucketed” in short-term instruments.

  • Client’s time horizon – i.e., the time between now and when you will need the funds you are investing – is a crucial factor affecting your tolerance for volatility and risk.

  • Our focus is on things we can control – maintaining a diversified portfolio, reducing expenses, minimizing taxes, and maintaining investment discipline. We do not believe in timing markets.

  • Advisor and Client will rebalance only infrequently: when market conditions change substantially, or in the course of either adding or withdrawing money, or as needed in the course of doing tax planning. The intent is to minimize trading fees.

I write up the investment policy statement for my clients and have us both sign it and each keep copies. It becomes the standard that we’re striving toward, what I call “my marching orders.” I can’t really propose any specific investments until I get this laid out, but when it snaps into focus I can get busy trading to get it into place. It typically takes some time to get all the way into balance, as we balance the costs of trading fees and capital gains against the risk of being over or under invested in some area.