When working with a financial adviser, the Investment Policy Statement (IPS) provides an overarching direction for how your money is managed. The IPS provides a framework for the investment strategy you’re trying to accomplish, in addition to spelling out who the investor is by defining risk tolerance and financial goals. It also outlines what is expected of the adviser.
The IPS is not something that is simply created after one meeting, but it is developed over time with your adviser. However, over time, your circumstances may change. You may have a substantial increase in income or your tolerance for risk may change, which may affect your investment horizons.
One of the most important factors is your time horizon, or the time you can afford to be invested before you need your money. We advocate the Ten Year Rule, where any money you need within the next 10 years should be placed in fixed-income investments to protect principle. For example, if you know within seven years, you will need to pay your child’s tuition or you will likely refinance your home, the money needed to cover those expenses should be placed in fixed-income investments that come due at the appropriate time.
Any money that is not needed within 10 years should be placed in equity investments for the long-term, as time will allow you to weather the volatility that is inherent with the stock market. This is especially true for your retirement accounts, as this is money you cannot generally touch until you are 59 ½ years old. As such, we believe this money should be invested in high-quality investments such as individual high-quality Large-cap stocks or mutual funds that invests in a similar manner. According to Ibbotson’s 2015 Annual Yearbook, the average annual return for Large-cap stocks since 1926 has been around 12%.
Mutual funds provide instant diversification, allowing investors with smaller amounts of money to diversify among many stocks in a cost effective manner. Generally, your adviser may be charging you a fee for managing your portfolio. This may be in addition to the management fees that are included in the cost of the mutual funds; therefore, if you are working with an adviser and you have at least $50,000 in assets, we recommend investing in individual stocks. With individual stocks, you and your adviser can control when you recognize capital gains or losses, ideally providing you better tax efficiency.
Depending on your risk tolerance, which should be outlined in your investment policy statement, you may allocate a portion of your overall portfolio to Small- and Mid-cap stocks or International stocks. While these can be riskier investments, when combined into a well-diversified portfolio, the volatility should be balanced with a long time horizon and other investments that may be more stable. According to Ibbotson’s 2015 Annual Yearbook, the long-term average annual return for Small-cap stocks has been 16.7% since 1926.
You may also prefer to use mutual funds or exchange-traded funds for specialized investments, such as International or Small-Cap stocks, because the management fee is worth the experience and knowledge provided by the fund’s professional management.
As all advisers should tell you, past performance is not indicative of future results. Investing is inherently risky. However, with guidance from experts and your expectations outlined in your Investment Policy Statement, you should have a good idea if you are on track to meet your financial goals. If you have questions on your investments or our Ten Year Rule philosophy, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
