Author Topic: My Investment Policy Statement  (Read 5459 times)

Joel

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My Investment Policy Statement
« on: October 25, 2015, 10:20:18 AM »
As I got married earlier this month, I have modified my investment policy statement slightly to include an exposure to TIPS and Real Estate, increase my international stock exposure, and document some additional considerations that I had not yet put on paper but was considering.

Here's my previous version of my investment policy statement:
http://forum.mrmoneymustache.com/investor-alley/my-investment-policy-statement/

Feel free to critique and provide feedback.

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Investment Policy Statement:

Allocations:
- Cash = 5%, increase to equal 6 months of expected expenses, the balance of house savings, or 10% upon retirement.
- Bonds/TIPS = half of age, split evenly.
- Real Estate = 10% up to age 25, increase 1% every 5 years, maximum 15%.
- Stocks = split 60% U.S. and 40% International.

Example holdings:
- Cash = VMMXX Prime Money Market
- Bonds = VBTLX Total Bond Market Index
- TIPS = VIPSX Inflation-Protected Securities
- Real Estate = VGSLX REIT Index
- U.S. Stocks = VTSAX Total Stock Market Index
- Int. Stocks = VTIAX Total International Stock Market Index

Holding considerations:
- Hold only low cost index funds with expense ratios of less than 0.50%.
- If 401k does not offer Vanguard funds, use equivalent investments or target retirement funds.
- Hold International Stocks in Taxable Accounts (as foreign tax credit can be claimed) or Tax-deferred Accounts.
- Hold Bonds and Real Estate in Tax-deferred Accounts (as interest and dividends are taxed at ordinary income tax rates).
- Hold U.S. Treasury Bonds in California Health Savings Account (as HSA earnings are subject to taxation in California, and U.S. Treasury Bond interest is tax-free).
- Utilize new contributions to rebalance the allocations.
- Rebalance monthly by adjusting the tax-deferred holdings or taxable holdings (if losses or long-term gains are available) when the differences exceed 2% (or 5% for stocks).

Tax considerations:
- Make traditional contributions when marginal tax rate is 25% or above.
- Make roth contributions when marginal tax rate is below 25%.
- Convert traditional holdings to Roth when marginal tax rate is below 25%.

Make contributions in the following priority:
- Maximum to company-sponsored 401k or Roth 401k.
- Maximum to IRA or Roth IRA.
- Maximum to HSA.
- Excess into Taxable Account.

Day-to-day considerations:
- Stay the course. Keep investing. Don't worry about the day-to-day fluctuations of the market.
- With each raise, increase retirement contributions. Maximize tax-deferred savings before increasing cost of living.
- Do not pay down debt that holds interest rates below the 30-year treasury rate. Aggressively pay down debts exceeding 5% interest rates.
- Avoid company stocks, individual stocks, annuities, derivatives, and get rich quick seminars.

House purchasing considerations:
- Do not purchase unless you plan to live in that area for 5-10 years.
- Make sure you could afford the payment on a 15-year mortgage with 20% down, but instead take the 30-year mortgage for flexibility.
- Reduce Bonds/TIPS allocation by the balance owed on low interest mortgages/loans.

Future considerations:
- Create a will once you have dependents. Update will and beneficiaries of all accounts with each new dependent.
- Hold term life insurance when you have dependents and are not financially independent.
- Utilize California 529 for college investments for dependents.
- In 50s, purchase long-term care insurance.

Retirement considerations:
- Make sure house is paid off prior to retirement.
- Retire when investments are equal to at least 25x expected annual spending in retirement.
- Make sure to factor in increased healthcare costs into expected annual spending in retirement.
- Withdraw approximately 4% of the portfolio each year for spending. Adjust for inflation each year.

Books read as inspiration:
- A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton Malkiel
- The Bogleheads Guide to Investing by Taylor Larimore

GGNoob

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Re: My Investment Policy Statement
« Reply #1 on: October 25, 2015, 05:44:02 PM »
Seems very detailed and thought out. I really like it and I think a lot of new people could use this as a good example.
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tj

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Re: My Investment Policy Statement
« Reply #2 on: October 25, 2015, 09:25:09 PM »
Not sure I'd use a money market fund for cash when you can 1%-ish at various online checking accounts.

arebelspy

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Re: My Investment Policy Statement
« Reply #3 on: November 08, 2015, 04:33:26 PM »
Different than some choices I'd make, but I can't argue that they're bad choices, and I love that you've thought it out.  A+.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
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We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."

johnny847

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Re: My Investment Policy Statement
« Reply #4 on: November 08, 2015, 04:55:56 PM »
- Hold only low cost index funds with expense ratios of less than 0.50%.

What if you get a 401k sometime in the future with only funds (index or otherwise) with ER's greater than 0.50%?

- Hold International Stocks in Taxable Accounts (as foreign tax credit can be claimed) or Tax-deferred Accounts.

So no international stocks in Roth but it's okay in a traditional? Why not?

- Rebalance monthly by adjusting the tax-deferred holdings or taxable holdings (if losses or long-term gains are available) when the differences exceed 2% (or 5% for stocks).

You'd be rebalancing in your retirement accounts first right?

Cornbread OMalley

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Re: My Investment Policy Statement
« Reply #5 on: November 08, 2015, 06:27:35 PM »
- Stocks = split 60% U.S. and 40% International.
Why so low for the allocation in US? You're young so why not 80%+ allocation in US and ride it for a few years?

- Real Estate = VGSLX REIT Index
I read this today and it made me think about my holdings in VGSLX.  Just something to think about.

http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/

- Rebalance monthly by adjusting the tax-deferred holdings or taxable holdings (if losses or long-term gains are available) when the differences exceed 2% (or 5% for stocks).
Would the allocations fluctuate this much to require rebalancing monthly? I'm just asking to learn because I've never experienced swings on a frequency like that. I rebalance once a year in January, and the highest my allocations drifted away from the target was 2% or 3%.

Future considerations:...
Consider purchasing an umbrella insurance policy to protect your assets when your net worth gets high.  The general rule is get enough to cover your assets and add another $1million in coverage.  Umbrella policies are inexpensive.  I have a $2million policy, and it costs me $14.65 a month.  I have enough to cover my net worth and an additional $1million in coverage.

Books read as inspiration:
I recommend reading and adding The Millionaire Next Door by Stanley and Danko.  I have the 1996 copy of the book.  In Chapter 2: Frugal, Frugal, Frugal there is a short section on becoming more tax efficient.  Read pages 55-69.  They talk about reducing realized income.  The example given is Ross Perot and what he does to keep the tax man at bay and stay wealthy.

Good job and keep at it!  You have the mindset to really achieve financial independence.  Most of the young folks I talk to nowadays think finances are boring and look for ways to get rich fast.  It took me 16 years plus to get close to two commas.  I'm not there yet but am close.  Perhaps next spring I will cross the seven-digit threshold.  But it took discipline, diligence, and sacrifice.  And reading through your policy statement you will avoid the errors that I made and will reach seven digits a lot faster than me.
 

Kaspian

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Re: My Investment Policy Statement
« Reply #6 on: November 09, 2015, 11:43:33 AM »
- Rebalance monthly by adjusting the tax-deferred holdings or taxable holdings (if losses or long-term gains are available) when the differences exceed 2% (or 5% for stocks).

The rest looks good but I wouldn't do the above.  One of the reasons for having a passive investment style is so that you don't have to mess with it all the time.  I'd rebalance once/twice a year at most and do it with new money when possible.  Rebalancing too often is called, "Not letting the dogs run."  (Meaning you're curtailing too often against a potential longer bull market in a specific allocation.)

Oh, just noticed you also said:

Quote
- Utilize new contributions to rebalance the allocations.

I think that will be difficult when the portfolio becomes huge.
« Last Edit: November 09, 2015, 11:45:22 AM by Kaspian »
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Joel

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Re: My Investment Policy Statement
« Reply #7 on: November 10, 2015, 12:22:16 AM »
Not sure I'd use a money market fund for cash when you can 1%-ish at various online checking accounts.

Money market fund is a good example that can be shared with most people not willing to chase high interest checking accounts and their requirements, but you are right, may not be the best, and it is not where my cash is actually held.

- Hold only low cost index funds with expense ratios of less than 0.50%.

What if you get a 401k sometime in the future with only funds (index or otherwise) with ER's greater than 0.50%?

It still makes sense to use the 401k for the tax deduction, but the goal with that is to make it clear that the intent is to hold low cost index funds.

- Hold International Stocks in Taxable Accounts (as foreign tax credit can be claimed) or Tax-deferred Accounts.

So no international stocks in Roth but it's okay in a traditional? Why not?

It would probably be better to say in Tax-advantaged accounts as opposed to tax-deferred accounts, however, that then means all accounts, so I will just update it to hold in taxable accounts when possible.

- Rebalance monthly by adjusting the tax-deferred holdings or taxable holdings (if losses or long-term gains are available) when the differences exceed 2% (or 5% for stocks).

You'd be rebalancing in your retirement accounts first right?

Rebalancing will occur with my new contributions primarily, however, I check my allocation monthly and rebalance if necessary. The rebalancing would be primarily in the tax-deferred accounts (i.e. retirement), however, I would be willing to adjust the taxable holdings, if I can realize capital losses, or when I have long-term capital gains at 0%.

- Stocks = split 60% U.S. and 40% International.
Why so low for the allocation in US? You're young so why not 80%+ allocation in US and ride it for a few years?

I think a 40% international allocation is sound. I do not think 80% US allocation is going to necessarily be better in the long-term.

- Real Estate = VGSLX REIT Index
I read this today and it made me think about my holdings in VGSLX.  Just something to think about.

http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/

That's certainly something to consider. I'll keep pondering that one.

- Rebalance monthly by adjusting the tax-deferred holdings or taxable holdings (if losses or long-term gains are available) when the differences exceed 2% (or 5% for stocks).
Would the allocations fluctuate this much to require rebalancing monthly? I'm just asking to learn because I've never experienced swings on a frequency like that. I rebalance once a year in January, and the highest my allocations drifted away from the target was 2% or 3%.

As mentioned above, I haven't actually needed to rebalance monthly, however, I keep an eye on the allocations and adjust my 401k contribution's allocations to keep my overall allocations in line with where I want them to be so that I only need to reallocate with new contributions.

Future considerations:...
Consider purchasing an umbrella insurance policy to protect your assets when your net worth gets high.  The general rule is get enough to cover your assets and add another $1million in coverage.  Umbrella policies are inexpensive.  I have a $2million policy, and it costs me $14.65 a month.  I have enough to cover my net worth and an additional $1million in coverage.

Yes. That is something I tabled to consider as I get more assets.

Books read as inspiration:
I recommend reading and adding The Millionaire Next Door by Stanley and Danko.  I have the 1996 copy of the book.  In Chapter 2: Frugal, Frugal, Frugal there is a short section on becoming more tax efficient.  Read pages 55-69.  They talk about reducing realized income.  The example given is Ross Perot and what he does to keep the tax man at bay and stay wealthy.

Thanks for the book recommendation. I'll put it in my queue.

Good job and keep at it!  You have the mindset to really achieve financial independence.  Most of the young folks I talk to nowadays think finances are boring and look for ways to get rich fast.  It took me 16 years plus to get close to two commas.  I'm not there yet but am close.  Perhaps next spring I will cross the seven-digit threshold.  But it took discipline, diligence, and sacrifice.  And reading through your policy statement you will avoid the errors that I made and will reach seven digits a lot faster than me.

Thanks! And thanks to everyone else who took a look and provided feedback!

Travelling Biologist

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Re: My Investment Policy Statement
« Reply #8 on: November 10, 2015, 12:58:52 PM »
Excellent. And I like some of the suggestions as well. I should develop ours!

Brokefuturedoctor

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Re: My Investment Policy Statement
« Reply #9 on: May 05, 2016, 06:02:39 AM »
I just started writing my own investment policy statement, and this is very helpful for making sure that I think about all the aspects involved. Thanks for sharing!

Joel

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Re: My Investment Policy Statement
« Reply #10 on: May 05, 2016, 08:16:27 AM »
I just started writing my own investment policy statement, and this is very helpful for making sure that I think about all the aspects involved. Thanks for sharing!

You are very welcome!

Joel

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Re: My Investment Policy Statement
« Reply #11 on: June 07, 2016, 09:55:21 PM »
I'm thinking about 3 significant changes:
1. Exclude cash from asset allocation
2. Eliminate allocation to REITs
3. Change Bond allocation from "1/2 my age" to "age - 20"

As we are now focusing on saving for a house down payment, I've determined that I have complicated my asset allocation significantly by including a cash allocation. As a result, I think I am going to exclude cash from my overall asset allocation, and keep approx. 6 months of living expenses plus my house down payment savings in cash. Note: We plan to buy a 4bed house in Sacramento, CA which could very well cost between 600k and 1m, so the 20% down payment held in cash will be a significant chunk of cash.

Given the house we plan to buy in California, I'm also questioning the need to hold REITs in my portfolio. The house we will eventually buy will be far more real estate than I think I will ever want in my overall portfolio, so with that said, I don't think holding REITs is going to add much value. Also, REIT funds cannot be purchased in both of our 401k accounts which complicates maintaining the chosen asset allocation.

Given we have a sizeable amount of funds held in cash, and are relatively young, I don't see a huge reason for a large bond allocation at our age. However, as we age, I would like to see our bond allocation increase. At age 80, my former allocation is only 40% bonds, whereas age - 20 would be 60% bonds. It changes my current allocation from 14% to 8% which isn't too significant of a decrease. I feel more comfortable with 60% bonds at age 80 than I do 40%.

If I make all these changes, it simplifies our allocation significantly and will make things easier to maintain going forward.

Any thoughts?
« Last Edit: June 09, 2016, 06:55:18 AM by Joel »

humblefi

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Re: My Investment Policy Statement
« Reply #12 on: June 07, 2016, 11:53:28 PM »
Congrats on a well thought out plan!

Seeing that you are from a high cost of living area and also a high tax area (California), I will suggest a few things that occur to me.
+ REIT in taxable may not be a tax efficient in the 25% tax bracket....but I would not want to drop it....REITs are one way I diversify my investment risk...regular dividends, tax free growth and also diversification across different real estate property types. I have 10% of my tax-advantaged funds in REITs (IRA+401k).
+ Why CA 529? CA 529 offers no state tax deduction for the amount deposited in the CA 529 like other states. If so, then why not choose something cheaper and better? Check out Vanguard 529 from Nevada....direct sold with no middlemen, cheaper and better performance.
+ You do not seem to have CA MUNI bonds....the dividends are federal and state tax free. Check out VCAIX. It is pretty expensive right now...wait for the federal interest rate hike for fund price to cool down a bit. And also check out the taxable equivalent yield calculator from Vanguard....no fed+state taxes lead to a decent gain with low risk.


Best of luck for your house purchase and FIRE!
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johnny847

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Re: My Investment Policy Statement
« Reply #13 on: June 08, 2016, 10:01:38 AM »
+ Why CA 529? CA 529 offers no state tax deduction for the amount deposited in the CA 529 like other states. If so, then why not choose something cheaper and better? Check out Vanguard 529 from Nevada....direct sold with no middlemen, cheaper and better performance.

Because California's 529 is cheaper than Nevada's
Fund Nevada ER California ER
US total market index 0.19% 0.10%
US Bond Market index 0.22% 0.17%
International Stock Market index0.35%0.14%

https://www.scholarshare.com/research/fees.shtml
https://investor.vanguard.com/529-plan/list#/529-plan/asset-class/month-end-returns

humblefi

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Re: My Investment Policy Statement
« Reply #14 on: June 08, 2016, 10:24:35 PM »
Because California's 529 is cheaper than Nevada's

Thanks for the correction. I went back and looked at the op's post and it does not say that he is using the age based option....I assumed that incorrectly.

+ The age based investment option's ER is 0.17% for the Moderate Growth option. https://personal.vanguard.com/us/funds/snapshot?FundId=4510&FundIntExt=INT. The corresponding age based options for Scholarshare 529 is listed at: https://www.scholarshare.com/research/fees.shtml
+ The passive age based option in CA 529 is comparable in ER to Vanguards, but the active ones are more expensive.



humblefi
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Cornbread OMalley

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Re: My Investment Policy Statement
« Reply #15 on: June 10, 2016, 08:40:31 PM »
I'm thinking about 3 significant changes:
1. Exclude cash from asset allocation
2. Eliminate allocation to REITs
3. Change Bond allocation from "1/2 my age" to "age - 20"

As we are now focusing on saving for a house down payment, I've determined that I have complicated my asset allocation significantly by including a cash allocation. As a result, I think I am going to exclude cash from my overall asset allocation, and keep approx. 6 months of living expenses plus my house down payment savings in cash...

Given the house we plan to buy in California, I'm also questioning the need to hold REITs in my portfolio. The house we will eventually buy will be far more real estate than I think I will ever want in my overall portfolio, so with that said, I don't think holding REITs is going to add much value.

Given we have a sizeable amount of funds held in cash, and are relatively young, I don't see a huge reason for a large bond allocation at our age. However, as we age, I would like to see our bond allocation increase.
Hi, Joel!  I think your ideas are well founded.

I keep my cash reserves out of my stocks asset allocation.  I aim to have six months of cash onhand for emergencies and emerging opportunities.  When I rebalance my stocks aseet allocation keeping cash separate makes the calculations much easier.

I think you need to consider the reason why you want to own a REIT.  Your house, although a significant real estate asset, does not produce cash flow unless you rent out its available space.  While the house may appreciate in value over time you will not realize that gain unless you sell.  A REIT generates cash flow in the form of dividends, which is taxed quite heavily, but is still cash flow.  I decided to own a REIT outside of a tax-sheltered account for the sake of the cash flow.

I also advocate reducing the bonds holding if you are very young.  I think the current guidelines of 100 minus your age, 110 minus your age, and 120 minus your age is too conservative.  I advocate 100% stocks especially in dividend producing mutual funds.  My experience has been that a sharp market downturn only puts a slight dent in the dividend stream.  I touch upon this in my journal when I took a look at my dividend returns versus my capital gains returns during the Great Recession.

zombiehunter

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Re: My Investment Policy Statement
« Reply #16 on: June 11, 2016, 12:08:37 PM »
Thanks for posting, I really enjoyed reading the tax considerations for the tax-advantaged vs. taxable accounts -- it makes sense, but I wonder does it not work well with some savings goals?

For example, I'm using a taxable investment account for some medium term savings goals (saving for a house, but could also be saving for early-FIRE income).  Therefore, investment allocation should favor more bonds and perhaps dividend stocks, both of which are not tax efficient.  International stocks with the foreign tax credit/deduction are more tax efficient, but much more risky and probably best utilized with long-term savings to provide diversification against US stocks.

On the other hand, the 401k / IRA funds are good shelters for bonds / dividends, but given that the savings timeline is closer to 30+ years, it makes the most sense for this account to be higher in equities and international stocks (and a good argument to be 100% equities). 

Kroaler

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Re: My Investment Policy Statement
« Reply #17 on: June 11, 2016, 12:39:26 PM »
I'm thinking about 3 significant changes:
1. Exclude cash from asset allocation
2. Eliminate allocation to REITs
3. Change Bond allocation from "1/2 my age" to "age - 20"

As we are now focusing on saving for a house down payment, I've determined that I have complicated my asset allocation significantly by including a cash allocation. As a result, I think I am going to exclude cash from my overall asset allocation, and keep approx. 6 months of living expenses plus my house down payment savings in cash...

Given the house we plan to buy in California, I'm also questioning the need to hold REITs in my portfolio. The house we will eventually buy will be far more real estate than I think I will ever want in my overall portfolio, so with that said, I don't think holding REITs is going to add much value.

Given we have a sizeable amount of funds held in cash, and are relatively young, I don't see a huge reason for a large bond allocation at our age. However, as we age, I would like to see our bond allocation increase.
Hi, Joel!  I think your ideas are well founded.

I keep my cash reserves out of my stocks asset allocation.  I aim to have six months of cash onhand for emergencies and emerging opportunities.  When I rebalance my stocks aseet allocation keeping cash separate makes the calculations much easier.

I think you need to consider the reason why you want to own a REIT.  Your house, although a significant real estate asset, does not produce cash flow unless you rent out its available space.  While the house may appreciate in value over time you will not realize that gain unless you sell.  A REIT generates cash flow in the form of dividends, which is taxed quite heavily, but is still cash flow.  I decided to own a REIT outside of a tax-sheltered account for the sake of the cash flow.

I also advocate reducing the bonds holding if you are very young.  I think the current guidelines of 100 minus your age, 110 minus your age, and 120 minus your age is too conservative.  I advocate 100% stocks especially in dividend producing mutual funds.  My experience has been that a sharp market downturn only puts a slight dent in the dividend stream.  I touch upon this in my journal when I took a look at my dividend returns versus my capital gains returns during the Great Recession.


This font hurts my eyes lol

Cornbread OMalley

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Re: My Investment Policy Statement
« Reply #18 on: June 11, 2016, 03:46:28 PM »
This font hurts my eyes lol
I like that font because it is much easier to read with my aging eyes!  haha!  Surely there are others on this forum who experience the same?