Writing an investment policy for yourself

Institutional investors operate under written policy statements, and individual investors almost never do, which is a substantial part of the difference in behaviour.

What it does

The function.

It converts future decisions from fresh judgements made under stress into comparisons against an existing plan.

It records the reasoning, so that the future version of you understands why rather than only what.

It acts as a commitment device, which behavioural research finds effective across domains.

And it creates a record against which decisions can later be assessed, which is what makes learning possible.

What to include

The components.

Objectives: what the money is for, when it is needed, and how much is required.

Separate objectives for separate purposes, since they have different horizons.

Time horizon for each objective.

Risk parameters: the target allocation, and — critically — the largest decline you are prepared to hold through, expressed in money rather than percentage.

Asset allocation: the target proportions and the reasoning.

The holdings used to implement it, and why those rather than alternatives.

Contribution plan: amounts, frequency, and how they increase.

Rebalancing rule: the trigger and the method.

What would cause a change, which is the most important section.

And what would not, which is more important still.

The what-would-not section

Worth writing explicitly.

A market decline of any magnitude.

A recession.

A forecast.

A news event.

Another asset performing better.

An article, a colleague's opinion or a social media post.

Writing these down when calm removes the ambiguity that stress otherwise fills.

The what-would section

Legitimate reasons for change.

A change in objective or horizon.

A change in circumstances affecting capacity for loss: income, dependants, health, job security.

Reaching a milestone that triggers a planned de-risking.

A material increase in costs, or a cheaper equivalent becoming available.

A fund materially changing its mandate.

And the annual scheduled review.

The decline plan

The most valuable single paragraph.

Write what you will do if the portfolio falls twenty per cent, thirty per cent and forty per cent.

Include the amounts in money.

Include the reasoning: that declines of this magnitude are normal, that recovery has historically followed, that selling converts a temporary loss into a permanent one, and that your horizon is unchanged.

Include the actions: continue contributions, rebalance according to the rule, do nothing else.

And date it, so that the future reader knows it was written before rather than during.

Reviewing it

On a schedule.

Annually, at a fixed time, rather than in response to markets.

Update the objectives and horizon.

Check whether circumstances have changed.

Check costs and whether cheaper equivalents exist.

Check the allocation against the target.

And note any changes made during the year and why, which builds the record.

Keeping the record

The learning mechanism.

Record every decision and the reasoning at the time, including decisions not to act.

Review the record annually.

Which is uncomfortable, since self-attribution bias means memory has already edited the reasoning to match the outcome.

And which is the only reliable way to distinguish skill from luck in your own decisions.

For couples

A specific benefit.

A written policy agreed by both parties removes the possibility of one person acting unilaterally during stress.

It establishes shared understanding of the objectives and the risk.

And it prevents the situation where one person holds all the knowledge, which is a vulnerability if that person becomes unavailable.

Which makes writing it together a worthwhile exercise beyond the document itself.

The simplest possible version

If a full document is too much.

One paragraph: what the money is for, when it is needed, what you hold, how much it might fall, what you will do when it does, and what would change your mind.

Dated and stored where you will find it.

Which is better than nothing by a wide margin, and which takes twenty minutes.

General information only, not investment advice. Investments can fall in value and past performance does not indicate future returns. Consult a regulated financial adviser.