Our Investment Policy Statement
I think it's about time we made an Investment Policy Statement (IPS)! It's important to create one when things are relatively calm in the stock market and you've got a level head on you. That way, when things take a turn for the worst, you can refer back to it as a guide when emotions start to run high and you're panicking.
Some say that an investment advisor is a great resource to go to when times are uncertain and you need someone to keep your emotions in check. Enter the Pseudo-Advisor - your Investment Policy Statement. What better point of reference than an emotionless piece of paper that reminds you of your plans and goals that YOU wrote when you were in a calm state of mind?
So what exactly is an Investment Policy Statement and what does it include? It's essentially a set of guidelines for investing that outlines general rules for the person reading it, and/or the executor of the plan. In our case, it's for Camilla and I to review once in awhile to gauge our progress to achieve our investing goals. The IPS generally includes investment timelines, goals, strategies, risk tolerance, and sometimes even investing philosophies. As I alluded to above, it's mainly meant to be a shield against emotional decision-making in times of uncertainty. After all, making decisions when emotions are high tend to lead to regrettable mistakes.
The IPS is meant to be viewed at least once a year and in times of uncertainty. Although it will tend to stay constant, it's worth reviewing yearly so we can be sure we're on track and adjusting if needed.
Since I am the main manager of our accounts, I decided to write the IPS the way I thought would be most appropriate - a letter to myself (reviewed by Camilla, of course). Here's how it goes:
Dear Khang and Camilla (but mostly Khang),
It's your boy Khang from the past, when things are calm and you've got a level head. If you're reviewing this Investment Policy Statement, it probably means you're looking to see if the plan is on track. It probably is, SO DON'T MESS WITH IT UNTIL YOU'RE ALMOST READY TO RETIRE, you big'ol dummy. Don't let your emotions get the better of you. Stick to the plan:
Remember the ultimate goal: Have $1.5 million saved up by December 2040 to achieve financial freedom.
As of October 2020 through the next 20 years up until the age of 50, your plan is to fund at least the maximum into each of your ROTH IRA accounts, 100% in a Total Stock Market Index Fund (SWTSX). Remember that over time, the total stock market goes up, otherwise, you've got bigger problems.
Concurrently while the ROTH IRA accounts are being maxed out, always - ALWAYS - contribute to the employer 401k. At the very least, it must be enough to get the company match. Invest 100% of that monies into an S&P 500 index if the choice is available. If you are able to max out the 401k contribution ($19,500 in 2020), then do so. These two choices should return at least 5% over time - though it's not much, it's a safe bet. Don't get greedy if you don't need to.
In the brokerage account with the "play money," continue to rebalance once in awhile, keeping in mind that it should eventually only be about 10% of your portfolio. If you ever have extra money on a downturn, do NOT sell your shares of any stocks in any of your platforms; it is actually your chance to BUY. Pour money from your side hustles into the stock market, preferably the Total Stock Market Index.
If an HSA is available, max it out as often as you can ($3,550 in 2020) and use monies for investments (getting as close to the S&P 500 as best you can). Save receipts of medical/dental/vision expenses to get reimbursements in the future (another source of money that is not considered INCOME). Keep letting this grow for many years to pay for health expenses in retirement.
This IPS shall be reviewed at least once per year. As you get closer to early retirement, start figuring out how to rebalance the portfolio to include bonds for more stability. Let future Khang do that - maybe 10-15 years from now. Then figure out the ROTH conversion ladder (5 year commitment).
The potential reasons to change the IPS: Khang's family's needs, Camilla's family's needs, kids, adoptions, or other catastrophic events. *Needs more consideration.*
Reasons to NOT change IPS: Short-term market swings. Don't panic. Take a deep breath and chill out, dude.
Lastly, remember to intentionally live the best life you can, without going overboard. Money only matters if it lets you live the life you love. Good luck!
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So there you have it! It's our first go at our Investment Policy Statement, but I think we did a good job!
Do you think we missed anything? Send us a note at faithandfi@gmail.com - we'd love to hear from you!
Your Friends,
Khang and Camilla