Monday, November 15, 2010

Ground Rules & Constraints: Investment Policy Statement (IPS)…Puttin’ It Together Part III

Ground Rules & Constraints: Investment Policy Statement (IPS)…Puttin’ It Together Part III

(Note: An IPS is not to be confused with IBD – though some say it has the same effect)

Objective:
Amount (after tax)
Rate of Return (after tax)
Inflation (deflation?) rate?
Start
Finish
Duration
Time Horizon for Accumulation if applicable
Time Horizon for Distribution (if different than
Duration)
Monitor
Frequency (of monitoring)
Rebalance (frequency)
Probability desired (Pessimistic, Optimistic, Realistic)
(no 100%!)

Where At Today:
Amount of Dedicated Resources
Monte Carlo Probability:

CONSEQUENCE OF DOING NOTHING:



Risk Constraints: Present Level – Desired Level (see prior blogs)

· Inflation or Deflation Risk
· Systemic Risk
· Interest Rate Risk –
· Liquidity Risk
· Market Risk Market Timing Risk
· Reinvestment Risk Repayment
· (Credit) Risk Monetary Risk – the value of currency declining
· Political Risk.
· Longevity Risk (A BIGGIE OFTEN IGNORED BY PLANNERS BUT FEARED BY CLIENTS WHETHER THAN KNOW THE NOMENCLATURE OR NOT –
· Divorce Risk

· Third, after you retrofit your portfolio per objective what each risk would look like (prone to offset) to make tradeoffs between the requirements of the goal and you concern for the risk –prone/offset ratio.

Retrofitting Constraints by Percentage by Level
(see prior blogs)

· Preservation of nominal capital
· Preservation of purchasing power
· Liquidity
· Restored liquidity (income from an illiquid assets)
· Current taxable income
· Tax sheltered income
· Capital appreciation
· Asset protection (from creditors)
· Tax savings

Level 1 (lowest risk)- _________% criteria:
Level 2 (below average risk) __________%, criteria:
Level 3 (average risk) ___________%, criteria:
Level 4 (above average risk) __________%, criteria
Level 5 (highest risk) ____________% criteria:

Target Percentage Allocation (as a result of the above)





Asset Categories to Avoid:


As is Target Acceptable Range Beta
Cash
Fixed Income
Equity Value
Domestic Growth & Inc.
Domestic Growth
Int’l Large
Int’l Medium
Int’l Small
Equity Income
Value
Equity Growth
Health
Technology
Energy
Other
Hedges
Other
Overrides (i.e no one stock, mutual fund etc investment to equal more than ____%

Other Factors Impacting & What To Do:

1. Percentage decline willing to accept before triggering sale:


2. Total Disability (are your insured, if not…)


3. Partial Disability (see #2)


4. Long term care (see number 2)


5. Advanced Medical Directive (what should change?)


6. Financial Durable Power of Attorney (who, what changes if in effect?)


7. Other


Potential Problem Analysis

(I suggest dealing with those that have a medium to high probability(P) (1) and medium to high seriousness (S) (2) and attempt to transfer the risk of those via insurance or otherwise that have a low probability (P) and a high seriousness (S) ((i.e. think hurricane, disability, long term care etc.)

Potential Problem P(1) S(2) Cause(s) Prevent Minimize

1.


2.


3.


4.


Whew! – that’s a lot – but it’s the first run. The question is do you want to play – who do your trust – or manage your goals? Most will spend 100,000 hours working making over their lifetime $2million, $5 million, $10million or more and not spend 200 hours keeping it.

Would you invest in a firm that has gross revenues of $10 million but spends less than 200 hours keeping it? What would you think about it’s management?

Again, personal financial life planning (Enough) is about healing financial anxiety – not making you a planner but for you to manage your goals and planner. Otherwise you can just blame, complain, and play the victim (which should come easy to liberals, collectivists, & progressives) --- Your choice.

At the least, this investment policy statement gives you a working paper framework to deal with your advisors

For more – get my book Enough probably available on ebay or used (as it is out of print) for a couple of bucks until – when and I – I do a third edition (which would be titled:

FUability©: Healing Financial Anxiety Puttin’ Money In Its Place- The ENOUGH(sm) Process

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