Author Topic: My Investment Policy Statement  (Read 10308 times)

Joel

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My Investment Policy Statement
« on: April 12, 2014, 09:46:37 AM »
Joel's Investment Policy Statement (Age 25):

Allocation:
- Bonds = Half my Age
- Stocks = 70% U.S. / 30% International

Three Index Funds:
- Total Stock Market Index Fund
- Total International Stock Market Index Fund
- Total Bond Market Index Fund

Holding Preferences:
- International Stocks in Taxable Account
- Bonds in Tax-deferred Accounts
- U.S. Treasury Bonds in Health Savings Account

Pension Considerations:
- Guarantueed return at the larger of 5% or the average yield on 30-year U.S. Treasury Securities annually. Based on the guaranteed return, this pension is included in my bond allocation.

International Stock Considerations:
- Hold international stocks in taxable account, as they allow for a foreign tax credit.

Bond Considerations:
- Hold bonds in tax-deferred accounts as interest and dividends are taxed at ordinary income rates.

Health Savings Account (HSA) Considerations:
- Hold investments in U.S. Treasury Bond Funds, as interest is tax-free in California. However, capital gains/losses are subject to taxation.

Emergency Fund Considerations:
- $10k at a minimum in my high-interest checking account, excluded from my asset allocation.

Tax Considerations:
- 401k & IRA contributions while at a marginal 25% tax rate
- Roth 401k & Roth IRA contributions while at a marginal tax rate below 25%

Reallocation Considerations:
- I will reallocate when any allocation is +/- 5% from my desired allocation.

Annual Contributions:
- Maximum to my company-sponsored 401k or Roth 401k
- Maximum to my IRA or Roth IRA
- Maximum to my 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.

Long-Term Goal:
- Retirement in my 50s
« Last Edit: December 06, 2014, 01:15:25 PM by Joel »

Joel

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Re: My Investment Policy Statement
« Reply #1 on: April 12, 2014, 09:51:40 AM »
Feel free to critique / comment as you see fit.

brewer12345

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Re: My Investment Policy Statement
« Reply #2 on: April 12, 2014, 10:11:06 AM »
Quote
Tax Adjustments to Asset Allocation:
- 15% reduction to Tax-Deferred Accounts (401k, IRA, Pension)
- 15% reduction to gains in Taxable Accounts

This is, in a word, bizarre.  I would strike all of this out of your IPS.

Joel

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Re: My Investment Policy Statement
« Reply #3 on: April 12, 2014, 10:13:30 AM »
Quote
Tax Adjustments to Asset Allocation:
- 15% reduction to Tax-Deferred Accounts (401k, IRA, Pension)
- 15% reduction to gains in Taxable Accounts

This is, in a word, bizarre.  I would strike all of this out of your IPS.

Why is that bizarre? How can 1 dollar in a tax deferred account be valued the same as 1 dollar in a Roth account?

http://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation
« Last Edit: April 12, 2014, 10:19:20 AM by Joel »

Roland of Gilead

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Re: My Investment Policy Statement
« Reply #4 on: April 12, 2014, 10:46:17 AM »
Quote
Tax Adjustments to Asset Allocation:
- 15% reduction to Tax-Deferred Accounts (401k, IRA, Pension)
- 15% reduction to gains in Taxable Accounts

This is, in a word, bizarre.  I would strike all of this out of your IPS.

Why is that bizarre? How can 1 dollar in a tax deferred account be valued the same as 1 dollar in a Roth account?

http://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation

If you are going to live a MMM lifestyle, it is very likely you can do 0% taxed conversions from your tax deferred to your Roth during early retirement, plus you may be in a 0% cap gains rate for your taxable account.

Joel

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Re: My Investment Policy Statement
« Reply #5 on: April 12, 2014, 10:54:08 AM »
It's possible, but it's also more conservative to assume a 15% reduction based on taxes as well. It's very possible I could pipeline my tax deferred accounts into Roth accounts but there is no guarantee of that at this point. I'm an accountant by profession, and I personally will lean on the conservative side when it comes time to determining if I actually have enough money to retire.

I am saving a significant percentage of my income, but don't necessarily plan to have my expenses at an extremely low level that would put me below a 15% marginal tax rate.
« Last Edit: April 12, 2014, 11:04:14 AM by Joel »

arebelspy

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Re: My Investment Policy Statement
« Reply #6 on: April 12, 2014, 10:57:28 AM »
Good for you for writing this down!

My only comment involves the pension:
(Age 25):
...
- Bonds = Half my Age
...
Pension Considerations:
- My current employer guarantuees a return at the larger of 5% or the average yield on 30-year U.S. Treasury Securities annually. Additionally, they contribute ~3% of my salary annually to my pension plan, and made an initial $5k contribution to start the plan. Based on the guaranteed return, this pension is included in my bond allocation.
...
Long-Term Goal:
- Retirement in my 50s

You are 25.  Planning to retire in your 50s.  That leaves you 25-30 years for that pension value to grow.  It will likely surpass a percentage of your NW that is equal to half your age in bonds.  Meaning if you count it as part of your bond AA, you won't hold any actual bonds, just stocks.  So you then have basically all the implications of a 100% equity position (the key one to me being no ability to sell something for rebalancing purposes).

You may be okay with that (and/or your portfolio may grow so flippin fast that you still hold some bonds, but nowhere near "half your age" due to the pension eating up a big chunk of that), I just wanted to point that out as food for thought.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Joel

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Re: My Investment Policy Statement
« Reply #7 on: April 12, 2014, 11:08:54 AM »
The caveat with the pension is that I only plan to work for this company for 4-5 more years. So the contributions will end up being less than 10k in total, and therefore, will not necessarily be my entire bond allocation. I will be working there long enough for it to vest though. It's really a stretch to call the plan a pension, it's more like a retirement account that only the employer contributes to with a guaranteed return that will be turned into an annuity upon retirement age. Their contributions increase drastically by the number of years at the firm and how old you are, but being in public account, it's very unlikely I will be there more than 10 years in total, and more likely around 5-7.

arebelspy

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Re: My Investment Policy Statement
« Reply #8 on: April 12, 2014, 11:13:29 AM »
Gotcha.   I'd probably count the pension as separate (like I would S.S., I wouldn't count that into my bond allocation either), but that's your call, just figured you may want to consider that.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

brewer12345

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Re: My Investment Policy Statement
« Reply #9 on: April 12, 2014, 01:22:05 PM »
Quote
Tax Adjustments to Asset Allocation:
- 15% reduction to Tax-Deferred Accounts (401k, IRA, Pension)
- 15% reduction to gains in Taxable Accounts

This is, in a word, bizarre.  I would strike all of this out of your IPS.

Why is that bizarre? How can 1 dollar in a tax deferred account be valued the same as 1 dollar in a Roth account?

http://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation

The first problem is that you have no likelihood of getting the tax haircut right.  It might be zero or it might be 50%.

The second (and far more compelling) problem is that you are exposed to the market performance/movements of the entire dollar value of the account regardless of your tax overlay.  In your case it means you would overallocate to bonds (since you are making a mental haircut to the account balance) and to anything that had a significant gain in your taxable account.

As someone else mentioned, it is highly unlikely you will not manage a tax rate substantially below 15% under current tax rules for a healthy chunk of the money.

I have a cash balance pension similar to the one you mentioned.  I count it in the bond bucket and it is most akin to a stable value fund.  Since it is a small portion of my net worth, the inability to buy equities with it in a downdraft doesn't matter.

arebelspy

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Re: My Investment Policy Statement
« Reply #10 on: April 12, 2014, 01:47:27 PM »
I have a cash balance pension similar to the one you mentioned.  I count it in the bond bucket and it is most akin to a stable value fund.  Since it is a small portion of my net worth, the inability to buy equities with it in a downdraft doesn't matter.

So why count it at all?
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

brewer12345

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Re: My Investment Policy Statement
« Reply #11 on: April 12, 2014, 01:50:52 PM »
I have a cash balance pension similar to the one you mentioned.  I count it in the bond bucket and it is most akin to a stable value fund.  Since it is a small portion of my net worth, the inability to buy equities with it in a downdraft doesn't matter.

So why count it at all?

I am vested so it is mine and I have the option to take the account balance as a lump sum any time I like.

arebelspy

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Re: My Investment Policy Statement
« Reply #12 on: April 12, 2014, 02:45:54 PM »
I have a cash balance pension similar to the one you mentioned.  I count it in the bond bucket and it is most akin to a stable value fund.  Since it is a small portion of my net worth, the inability to buy equities with it in a downdraft doesn't matter.

So why count it at all?

I am vested so it is mine and I have the option to take the account balance as a lump sum any time I like.

Well sure, I'd count it in net worth, but I'm just wondering why count it in your AA.  You can't rebalance with it, it's small enough apparently to not affect much. I just don't see the merits of counting a pension in your AA as part of the bond component, unless it's making up a substantial amount of your living expenses, meaning you want to go more aggressive with your AA.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

warfreak2

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Re: My Investment Policy Statement
« Reply #13 on: April 13, 2014, 04:40:51 AM »
Well sure, I'd count it in net worth, but I'm just wondering why count it in your AA.  You can't rebalance with it, it's small enough apparently to not affect much. I just don't see the merits of counting a pension in your AA as part of the bond component, unless it's making up a substantial amount of your living expenses, meaning you want to go more aggressive with your AA.
A small percentage of net worth isn't necessarily a small percentage of the bond bucket. With a $500k net worth and an 80%/20% bond split, for example, a pension valued at $10k in the bond bucket is the difference between $100k in a bond index, and $90k in a bond index. So, 2% of net worth, but 10% of the bond bucket. So, not so insignificant, but also:

However far the stock market drops, he has enough liquid bonds to rebalance. Even with stocks at infinitessimally low prices, he'd sell $80k of his bond index funds to buy stocks, keeping $10k in the bond index, and $10k in the pension (i.e. $80k/$20k stocks bonds). He can even sustain a further 62.5% stock market crash after that!
« Last Edit: April 13, 2014, 04:44:29 AM by warfreak2 »

arebelspy

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Re: My Investment Policy Statement
« Reply #14 on: April 13, 2014, 08:06:37 AM »
Well sure, I'd count it in net worth, but I'm just wondering why count it in your AA.  You can't rebalance with it, it's small enough apparently to not affect much. I just don't see the merits of counting a pension in your AA as part of the bond component, unless it's making up a substantial amount of your living expenses, meaning you want to go more aggressive with your AA.
A small percentage of net worth isn't necessarily a small percentage of the bond bucket. With a $500k net worth and an 80%/20% bond split, for example, a pension valued at $10k in the bond bucket is the difference between $100k in a bond index, and $90k in a bond index. So, 2% of net worth, but 10% of the bond bucket. So, not so insignificant, but also:

However far the stock market drops, he has enough liquid bonds to rebalance. Even with stocks at infinitessimally low prices, he'd sell $80k of his bond index funds to buy stocks, keeping $10k in the bond index, and $10k in the pension (i.e. $80k/$20k stocks bonds). He can even sustain a further 62.5% stock market crash after that!

That's fine, but none of it is a reason to count it. 

Why not, in your scenario (500k net worth and an 80%/20% bond split, for example, a pension valued at $10k counting, so 90k in bonds) say instead you have a 490k portfolio and (with 90k bonds) your AA is 92/18?

I'm just not seeing the compelling reason to count the pension as part of that AA, it's a completely separate item.  It'll reduce your living expenses, but once you're at that point you should set your AA to what makes you comfortable to cover the rest.

I mean, I don't care.  Do whatever makes you happy.  :)

I'm just asking because I'm genuinely curious why you do it that way.

Do you count S.S. as part of your bond allocation?  If not, why not?

Maybe because you don't think it's stable or will be there, though the same could potentially be said of your pension, but assuming you do realize that S.S. will be there, why wouldn't you count that as well?

When you can articulate why you don't count S.S. as part of your bond portfolio, you'll see why I wouldn't count a pension.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Joel

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Re: My Investment Policy Statement
« Reply #15 on: April 14, 2014, 09:06:24 AM »
Quote
Tax Adjustments to Asset Allocation:
- 15% reduction to Tax-Deferred Accounts (401k, IRA, Pension)
- 15% reduction to gains in Taxable Accounts

This is, in a word, bizarre.  I would strike all of this out of your IPS.

Why is that bizarre? How can 1 dollar in a tax deferred account be valued the same as 1 dollar in a Roth account?

http://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation

The first problem is that you have no likelihood of getting the tax haircut right.  It might be zero or it might be 50%.

The second (and far more compelling) problem is that you are exposed to the market performance/movements of the entire dollar value of the account regardless of your tax overlay.  In your case it means you would overallocate to bonds (since you are making a mental haircut to the account balance) and to anything that had a significant gain in your taxable account.

As someone else mentioned, it is highly unlikely you will not manage a tax rate substantially below 15% under current tax rules for a healthy chunk of the money.

I have a cash balance pension similar to the one you mentioned.  I count it in the bond bucket and it is most akin to a stable value fund.  Since it is a small portion of my net worth, the inability to buy equities with it in a downdraft doesn't matter.

A few comments, whose to say that it is a bad thing that the tax adjustment actually causes me to have more bonds in my tax-deferred account than I would otherwise have with this allocation? It's probably not a bad thing, considering my aggressive percentage of bonds.

Another point though, I live in California, and probably always will. Capital gains/losses are all taxed in California without special treatment. At $50k per year income, you are hit with a marginal 8% tax rate in california... so let's just say approximately 4% effective tax rate. That combined with the federal taxes I will likely pay, it's safe to say that a 15% tax rate is a reasonable estimate. My marginal tax rate upon retirement will likely be above 15%, and my effective tax rate may be someone close to 15%.

Either way, it's causing me to hold slightly more bonds than half my age. I don't see a problem there. There's no guarantee that all those dollars will be untaxed upon retirement, just as there is no guarantee that they will be taxed at 15%, but that's a reasonable estimate.

brewer12345

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Re: My Investment Policy Statement
« Reply #16 on: April 14, 2014, 10:46:18 AM »
Well sure, I'd count it in net worth, but I'm just wondering why count it in your AA.  You can't rebalance with it, it's small enough apparently to not affect much. I just don't see the merits of counting a pension in your AA as part of the bond component, unless it's making up a substantial amount of your living expenses, meaning you want to go more aggressive with your AA.
A small percentage of net worth isn't necessarily a small percentage of the bond bucket. With a $500k net worth and an 80%/20% bond split, for example, a pension valued at $10k in the bond bucket is the difference between $100k in a bond index, and $90k in a bond index. So, 2% of net worth, but 10% of the bond bucket. So, not so insignificant, but also:

However far the stock market drops, he has enough liquid bonds to rebalance. Even with stocks at infinitessimally low prices, he'd sell $80k of his bond index funds to buy stocks, keeping $10k in the bond index, and $10k in the pension (i.e. $80k/$20k stocks bonds). He can even sustain a further 62.5% stock market crash after that!

That's fine, but none of it is a reason to count it. 

Why not, in your scenario (500k net worth and an 80%/20% bond split, for example, a pension valued at $10k counting, so 90k in bonds) say instead you have a 490k portfolio and (with 90k bonds) your AA is 92/18?

I'm just not seeing the compelling reason to count the pension as part of that AA, it's a completely separate item.  It'll reduce your living expenses, but once you're at that point you should set your AA to what makes you comfortable to cover the rest.

I mean, I don't care.  Do whatever makes you happy.  :)

I'm just asking because I'm genuinely curious why you do it that way.

Do you count S.S. as part of your bond allocation?  If not, why not?

Maybe because you don't think it's stable or will be there, though the same could potentially be said of your pension, but assuming you do realize that S.S. will be there, why wouldn't you count that as well?

When you can articulate why you don't count S.S. as part of your bond portfolio, you'll see why I wouldn't count a pension.

In this case, its not a straight forward pension.  This is quoted to me as a lump sum balance in the amount I am entitled to be cut a check for.  It is not market sensitive, but earns interest very similar to a stable value fund.  I do not look at or use to value this amount the potential future pension payments.  Since my fixed income allocation (of about 30% of total portfolio) is relatively broadly defined to include bonds, CDs, I Bonds, foreign bonds and cash equivalents like money market funds, I have no problem including this lump sum amount which equals about 3% of my portfolio.  If stocks went down 90% I would get cut a check and go shopping.

arebelspy

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Re: My Investment Policy Statement
« Reply #17 on: April 14, 2014, 11:18:39 AM »
Makes perfect sense.  Thanks for explaining the reasoning Brewer.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

jexy103

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Re: My Investment Policy Statement
« Reply #18 on: April 19, 2014, 01:27:55 PM »
Joel, I just wanted to say thank you for sharing your IPS with the forum. After 2.5 years of frequent personal finance reading and studying, I had somehow managed to never come across an IPS. After seeing your post, I did a little research and I now have my very own IPS all typed out and pretty. I don't plan to use an investment advisor any time soon, but there's a lot of value in having your own plans and strategies written out for your own reference. So again, thanks for sharing!

Nords

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Re: My Investment Policy Statement
« Reply #19 on: April 19, 2014, 11:14:53 PM »
Joel, I just wanted to say thank you for sharing your IPS with the forum. After 2.5 years of frequent personal finance reading and studying, I had somehow managed to never come across an IPS. After seeing your post, I did a little research and I now have my very own IPS all typed out and pretty. I don't plan to use an investment advisor any time soon, but there's a lot of value in having your own plans and strategies written out for your own reference. So again, thanks for sharing!
The biggest advantage of an IPS is during a recession, when you review it to boost your morale and reaffirm your commitment to stay the course.

It's also pretty funny to see what was so darned important to us 5-10 years ago, and how confident we were in our predictions...

Frugal Father

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Re: My Investment Policy Statement
« Reply #20 on: June 15, 2014, 05:38:43 PM »
Hey Joel. Thanks for posting this as I'm in a very similar situation (26 and just finishing my first year in public accounting) and it's helpful to see someone's strategy nailed down in such detail. Definitely made me think more about my own investment strategy.

Joel

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Re: My Investment Policy Statement
« Reply #21 on: December 06, 2014, 01:16:12 PM »
I've decided to revise my IPS to eliminate the tax adjustments to my allocation as they provide negligible benefit for the complication that they add.