Critique my Investment Policy Statement

[nkt0]

Hi y'all,

I put together an investment policy statement and i'd like some feedback on what i'm missing, what can be improved, etc. I'm not looking for individual fund advice, but rather feedback on what's too vague or unclear or overlooked.

Investment Objective
Reach 27.5 times my annual expenses ($24,000) to safely achieve financial independence as quickly as possible (less than 5 years). Total: $660,000

Asset Allocation
Maintain an aggressive 90%+ stock allocation diversified across US and international stocks. Remainder in cash or bonds.

Funds & Accounts
Use low-cost ESG (environmental, social, governance) exchange-traded funds. Try to assume only market risk as far as possible. Try to shelter tax-inefficient funds in tax-advantaged accounts to reduce tax drag.

Target Allocation
IRAs
ESGV 88%– Roth IRA, and Traditional IRA
VSGX (International) 10% – Roth IRA, and Traditional IRA
AAPL 2% – Ride this with standing stop-loss order, no rebalancing

401ks
VOO 90% – Current 401k
BND 10% – Current 401k
BNY Mel S&P 500 Ind 100% – Legacy 401k

Taxable
ESGV 70%– Taxable
VSGX (International) 10% – Taxable
VGT (Technology) 10% – Taxable only
FLCH (China) 10% – Taxable only
Individual stock < 1% – Taxable, Vanity investment from SO’s childhood
Individual stock < 1% – Taxable, Additional risk on small investment

Other considerations
Automate future contributions when possible. Use dollar-cost averaging when possible. Rebalance yearly. No market timing. Exact sub-allocations are not as important as maintaining the overall 90+stock/fixed allocation - no need to make things complex in order to meet sub-allocation targets.

[RWD]

Personally I prefer to target the entire portfolio's asset allocation instead of specifying what it should be in each bucket. Because what happens if you roll one 401k into an IRA? Or what if the balance of one bucket starts outpacing another? By having an overall portfolio desired allocation you can still keep specific funds in each bucket but rebalancing keeps the other accounts in mind.

[cool7hand]

+1 on preferring to maintain one asset allocation across all platforms\accounts. Much cleaner. One spreadsheet is all that's needed.

[ixtap]

Why DCA when possible? Do you mean periodic investing? That is, what do you do with a lump sum, like a bonus? If you really mean DCA, you should set a schedule for how to DCA these lump sums.

Do you have a specific date or trigger for rebalancing? If so, write it down. ie, we rebalance the weekend after RSUs settle, so it is a specific time of year, but the actual date floats.

What changes when you meet your stated goal? What changes if you miss the deadline for your stated goal? Do you have any other triggers for when/how you adjust your IPS? ie, some have to wait six months before implementing changes.

[Watchmaker]

If you like to have the breakdowns for each account, I think that's fine, but I'd also have a AA which include the breakdown between US and International for the entire portfolio. I'd also specify to rebalance on my birthday (or whatever) rather than 'once a year'.

And I'd include a section for how the IPS can be modified. Are you allowed to change the AA for financial reasons? Lifestyle reasons? Age?

[KarefulKactus15]

If you like have the breakdowns for each account, I think that's fine, but I'd also have a AA which include the breakdown better US and International for the entire portfolio. I'd also specify to rebalance on my birthday (or whatever) rather than 'once a year'.

And I'd include a section for how the IPS can be modified. Are you allowed to change the AA for financial reasons? Lifestyle reasons? Age?

This sounds overkill but I use this on other finance do rules I write for myself.

Also I didn't see it, but add a section for rebalance conditions.  I found myself micro rebalancing took frequently, now I have hard % variation from ips target %.   It forces me to sell the highs and buy the lows without over doing it.

[Watchmaker]

If you like have the breakdowns for each account, I think that's fine, but I'd also have a AA which include the breakdown better US and International for the entire portfolio. I'd also specify to rebalance on my birthday (or whatever) rather than 'once a year'.

And I'd include a section for how the IPS can be modified. Are you allowed to change the AA for financial reasons? Lifestyle reasons? Age?

This sounds overkill but I use this on other finance do rules I write for myself.

Also I didn't see it, but add a section for rebalance conditions.  I found myself micro rebalancing took frequently, now I have hard % variation from ips target %.   It forces me to sell the highs and buy the lows without over doing it.

Haha- must you quote me before I fix all my typos?!

Regarding rebalancing-- OP did say rebalancing yearly. I took that to mean exactly once a year, though it may also mean at least once a year or not more than once a year-- OP might even change what they think it means over time-- so a bit more specificity would be good.

[Villanelle]

When, how (actual sales or just changing future investments?) and how often will you rebalance?  (You said "yearly", but just make sure you know exactly what that means, and whether there are any circumstances that would trigger you to do it more frequently, like a large drop or steep increase that puts your AA way off mid-year.)

Also, you list a target dollar amount and an annual budget multiplier as your target, but those might not always be the same.  What happens if your budget increases to $26,000?  To keep it simple, I'd just amend the first part to specify that I want 27.5x annual expenses.  Also, I wouldn't include a timeline in my IPS.  Maybe you have a major expense and it takes you 6 years, or you experience a windfall or a big raise or something else and it is only 4 years.  Knowing you want to do it ASAP is important, but for me, that isn't really part of an IPS. 

[MustacheAndaHalf]

@nkt0 - You list each account separately, which hides the overall allocation.  I have no idea what percentage overall you have in bonds or international stocks.  It would be easier to read if each percentage was of your overall, total portfolio.

That legacy 401(k) looks annoying - have you considered rolling it into a Traditional IRA at Vanguard?  (I'm assuming you're at Vanguard based on your ETF picks)

Inflation means you can't live on $24,000 forever.  But your portfolio is expected to grow over time, allowing you to live on a fixed percentage.  So you might target 3.6% withdrawal rate of your $660,000 portfolio, which is $23,760 the first year, and grows with your portfolio.

[ChpBstrd]

You're missing the following:

-Emergency fund or line of credit
-Target savings rate (THE most important factor for when you retire)
-How you will handle drawdowns / bear markets (it helps to make this explicit so you know you are violating your plan when you panic sell.)

I, for one, think it's very reasonable to list target allocations by account type. You wouldn't want to hold dividend payers or interest payers in taxable if you could hold these in an IRA and defer taxes for decades. As you get closer to retirement, it'll be time to update the statement with a withdraw plan.

[frugalnacho]

I agree with going with an overall AA.  It's irrelevant what's in each account specific account so long as overall AA is maintained.  I would also clarify how much you want domestic vs international.

And I would put more specific parameters on rebalancing.  I rebalance once a year, on my birthday, if it's more than 5% out of whack.  I also check the AA and try to make ongoing contributions to the lagging fund so I'm always pushing AA back to target rather than exacerbating the drift.

 

[Villanelle]

I agree with going with an overall AA.  It's irrelevant what's in each account specific account so long as overall AA is maintained.  I would also clarify how much you want domestic vs international.

And I would put more specific parameters on rebalancing.  I rebalance once a year, on my birthday, if it's more than 5% out of whack.  I also check the AA and try to make ongoing contributions to the lagging fund so I'm always pushing AA back to target rather than exacerbating the drift.

 

I think there's a middle ground.  I do believe that having an overall AA is most importnat, because once you divide it up, you could end up far from where you want to be when your money doesn't end up evenly across accounts.  So I'd start with an overall AA.  But trying to get certain types into certain kind of accounts for the most advantageous tax picture makes sense.  For me, that wouldn't go in an IPS, but if the OP desires that level of specificty, cool.  Otherwise, just a note (either mental, or in the IPS) that taxable bonds, TIPS, REITs, etc. will go in pre-tax account where possible, and growth stocks in taxable, is probably more than sufficient.

But if you, OP, really feel like you need the breakdown per account, I think you still need to do an overall AA and make that the primary guidance, or else as accounts grow disproportionately from one another you could end up pretty far from where you want to be.  On a less granular level to make it way to demonstrate, if you want 20% in bond and 80% in equities and you start out that when when the account that is 90%% equites grows faster than other accounts, you may end up only 12% bonds, because you aren't tracking overall. 

[frugalnacho]

Yes for sure use the most advantageous account type for the investment, but an overall target AA is important.

[PDXTabs]

So, I realize that I'm supposed to critiquing your IPS and not your investment choices. However, I noticed that you have less invested internationally than typically recommended. I would at least write down why you chose the ratios that you chose, personally. Similarly I would write down the reasoning for your SP-500 tilt over total market.

[nkt0]

Thank you all for the great advice so far. Exactly what i was looking for. I’ll work on incorporating all of it and repost when i’m done.

To address one point directly regarding my legacy 401k account. It’s in a weird university pension system where i can’t rollover or move it until i’m 55 without losing all of my employer match, so it just sits in the lowest cost fund they have available until i’m old enough.

[nkt0]

Here’s an updated version. More feedback welcome!

Investment Objective
Reach 27.5 times my annual expenses to safely achieve financial independence as quickly as possible.

Asset Allocation
Maintain an aggressive 90%+ stock allocation diversified across US (60-70%) and international stocks (30-40%). Remainder in cash or bonds.

After achieving FI, rebalance portfolio to 60/40 stock-bond split, then implement a Rising Equity Glidepath for a 10-year return to 90/10 equities/bond allocation.

Funds & Accounts
Use low-cost ESG (environmental, social, governance) exchange-traded funds. Try to assume only market risk as far as possible. Try to shelter tax-inefficient funds in tax-advantaged accounts to reduce tax drag.

Target Allocation
Pre-FI
ESGV (US stocks) 48%
VSGX (Intl stocks) 22%
FLCH (Intl stocks) 5%
Individual stocks (US stocks) 15%
EUSB (Bonds) < 10%

Post-FI
ESGV (US stocks) 42%
VSGX (Intl stocks) 21%
EUSB (Bonds) 40%

Post-Glide
ESGV (US stocks) 63%
VSGX (Intl stocks) 27%
EUSB (Bonds) 10%

Other considerations
Automate future contributions when possible. Use monthly dollar-cost averaging for large lump sums when possible. Rebalance at least once a year as well as after FI and during glidepath or if asset mix gets off by more than five points. No market timing.

Use a 3.75% or smaller withdrawal rate after FI (adjusted based on annual income from other sources).

[vand]

Personally I think you need to complete remove your timelines from your IPS.


Phrases like "x27.5 within the next 5 years", "as quickly as possible".. these statements sit uncomfortably as a statement of intent, because you have absolutely no control over what the market does, it's unwise to put a timeframe on your objectives.

An IPS should only focus on what you personally have control over: you asset allocation, your behaviour, and your rules for buying and selling.

[KarefulKactus15]

Personally I think you need to complete remove your timelines from your IPS.


Phrases like "x27.5 within the next 5 years", "as quickly as possible".. these statements sit uncomfortably as a statement of intent, because you have absolutely no control over what the market does, it's unwise to put a timeframe on your objectives.

An IPS should only focus on what you personally have control over: you asset allocation, your behaviour, and your rules for buying and selling.

For this I typically have a statement of intent listed as such at the top of my documents. It includes reason for documents, long term goals and any other reflection I add.
I sometimes make note of discipline short comings to highlight the need for a written policy.

But like you said, the hard numbers should be things in your control.

[vand]

Personally I think you need to complete remove your timelines from your IPS.


Phrases like "x27.5 within the next 5 years", "as quickly as possible".. these statements sit uncomfortably as a statement of intent, because you have absolutely no control over what the market does, it's unwise to put a timeframe on your objectives.

An IPS should only focus on what you personally have control over: you asset allocation, your behaviour, and your rules for buying and selling.

For this I typically have a statement of intent listed as such at the top of my documents. It includes reason for documents, long term goals and any other reflection I add.
I sometimes make note of discipline short comings to highlight the need for a written policy.

But like you said, the hard numbers should be things in your control.

It also highlights a lack of understanding of one of the laws of investing: to achieve higher returns you must take more risk, with the understanding that sometimes it will not pay off in the timeframe that you expect. That is the nature of risk/reward.

Aggressive portfolios can get you to where you want to get to faster if markets behave as you expect, but they can absolutely send you the longer way around too.

Any IPS worth the paper it isn't written on should acknowledge what is an acceptable vs unacceptable range of outcomes.

[nkt0]

Should i add info about avoiding sequence of return risk and details on how i intend to do that?

[joe189man]

I noticed you only have one investment objective, to generate the funds of 27.5x annual spend. What about other objectives? Like payoff a house or kids retirement, or travel, larger one time future purchase items?

Thanks for sharing your IPS, i worked on mine this weekend and after reviewing yours have realized i am light on which funds  to focus on. I was mostly focused on what my objectives where, the timeline to achieve them, and ~how much needs to be saved each month to reach them in the selected time frame (assuming a static inflation and rate of return).

[MustacheAndaHalf]

You cannot both have 90% stocks and avoid sequence of return risks.  If you aim for 90% stocks, you must be flexible on your retirement date, since a correction could drop your nest egg below what is needed.

If you replace EUSB (iShares Total Bond) with BND (Vanguard Total Bond), you can drop the expense ratio from 0.12% down to 0.035%, if you want.  A downside is raising "duration" from 5.8 to 6.6, which means rate increases hurt more (0.5% increase becomes a 2.9% drop vs 3.3% drop, respectively).  You could also use a mix of Vanguard Short-Term (BSV) and Total Bond if that's a concern.

I really like that international is about 1/3rd of your equity allocation.  The U.S. and Europe tend to win different decades - sometimes the U.S. for 10 years, sometimes Europe.  Better to have both.

[nkt0]

I noticed you only have one investment objective, to generate the funds of 27.5x annual spend. What about other objectives? Like payoff a house or kids retirement, or travel, larger one time future purchase items?

Travel is part of my budget, which is separate from my FI goal. Paying off my house is not a priority as i am locked in to a low fixed rate. I guess the other related objective is to free myself to make decisions on how i spend my time without regards to meeting my basic needs, but that’s just a restatement of the idea of FI.