Hey guys, here's my investment policy statement. It was copy pasted from Word, so the formatting is a little wonky, but it's pretty readable (and long). Let me know what you guys think. I assume the main topics of concern will be GEM and Asset Allocation.
Investment Policy Statement
Goals
Mindset
The most important goal is to achieve the proper mindset. The best mindset is one that allows financial stability with little stress and that does not succumb to the vagaries of the market. The goal is not to make a ton of money or to work as little as possible. The goal is to attain financial control over one’s life. Do not try to time the market. Do not sell in a panic. Do not make finances a hobby. The best mindset allows one to have planned finances correctly and focus efforts on happiness for myself and loved ones and making the world a better place.
Retirement
The goal of retirement is targeted for 2026.
Retirement can be supported if retirement income can support expenses. Future expenses will be based on the last 2 years of expenses. If the last 2 years of expenses, not including extenuating circumstances involving major costs or windfalls, can be sustained from investment income and part time work, retirement can be considered. Healthcare costs must be calculated separately from past expenses.
Retirement income is set to be calculated by the MadFientist’s Safe Withdrawal Rate Calculator, which is based on the Shiller-CAPE Index. It is currently 3.5%. The calculator is located here:
https://lab.madfientist.com/calculators/safe_withdrawalHome Ownership
Home ownership is expected in the next 5 years. Hopefully stability in career and location allows this. The choice of home should be based on lifestyle and not attempt to expand lifestyle to things that are not currently hobbies or activities. The choice of home should prioritize quality of life in all the ways that matter, including proximity to work, green space, and culture. This implies that size is not a large concern.
Home ownership is not a must. If no affordable homes are available in a location that provides happiness or meets criteria above, a home does not have to be purchased. This will have benefits in flexibility over time and should not be considered a failure. That said, home ownership’s ancillary benefits should be taken advantage of if possible.
Savings
Savings goals are based on expected retirement date. With the current retirement date, savings rate will need to be 64% of current salary. This can be improved with salary increases or may need to improve based on unforeseen career obstacles. This rate can be reduced with better part time pay in retirement.
Current savings rate of the last 12 months (as of October 2018) has been 55%. A savings rate of 55% means realizing the retirement goals a full 3 years later. Discipline must be improved to achieve the goals outlined.
Savings will include Roth IRA, 401k, traditional IRA, normal brokerage accounts, savings accounts, and checking accounts.
Investments
Principles
The key principle will be one of humility. Do not try to outsmart the market. Investment in index funds beats the vast majority of professional asset managers, and keeping the portfolio squarely centered on diversified index funds is the smart, simple move.
Taxes and expenses on investments will be minimized. This will be accomplished through retirement vehicles and choosing brokerages that charge less in expenses, such as Vanguard.
Home ownership is a useful investment vehicle, but not a necessary one if lifestyle, career, or circumstances do not allow it.
Strategies
Tax Avoidance
Tax Avoidance will be achieved by maximizing use of retirement vehicles. 401(k)s reduce taxable income by $18,500 in 2018. Roth IRAs are not taxed when withdrawing contributions, and not taxed at all after 59.5 years old. Both investment vehicles will be maxed out yearly.
Retirement Fund Withdrawal
The Roth Ladder will be the key strategy to accessing retirement funds before traditional retirement age. The following link describes the strategy.
https://www.madfientist.com/how-to-access-retirement-funds-early/Asset Allocation
Assets should be focused on passively managed, diversified, low expense index funds.
Global Equity Momentum will drive the allocation strategy for funds that do not incur fees with transfers, buying, or selling. This includes funds in most retirement vehicles. Global Equity Momentum is described in greater detail on personal finance spreadsheets. Historically it calls for a roughly 65/35 ratio of equity to fixed income over time. But at any one moment in time, it calls for 100% allocation into one of 3 asset classes: a broad global index fund, a broad US index fund, and a conservative bond fund. GEM will be used in my Roth IRA and Traditional IRAs at Vanguard.
Funds in brokerage vehicles will be in an 80/20 equity/fixed income allocation and buying and selling will be minimized to avoid taxation. Equity will be split between Total US Stock Market Index and Total World except US Index. The ratio between them is not considered important, but as of today is approximately 75/25:US/World. The bond fund is a Total US Bond Market Index Fund.
Spending
Overall lifestyle spending is the key variable that affects retirement date. Spending money should be focused on things that have been shown to provide happiness. Those things are experiential, give opportunities for growth, and increase connection with others. Travel, cooking, exercise, and seeing loved ones are great examples of ways to spend money that create happiness. Consumerism does not.
Spending will be tracked monthly and categorized. Over time this will show areas that can be improved and the true costs of bad and good habits. Savings rate will be especially noted. This will be tracked in the finance spreadsheet.
In general, possessions should not be purchased on credit. A home is a notable exception. Nor should possessions cost money to store. This implies one has too much stuff and it isn’t being used since it is in storage. This is wasteful and does not add happiness to life.
Risk Mitigation
An emergency fund will be maintained. The emergency fund will consist of 6 months of expenses. One third will be in a checking account for ease of access. The rest will be in a savings account.
This document itself is a method to avoid risk. The primary risk is personal weakness in investing too much in one asset, trying to time the market, or panic selling. This document outlines the strategy and should be followed. If adhered to, risks will be mitigated. For that reason, changes to this document should be considered for 3 months before implementation.