The Investment Policy Statement

the investment policy statement

Recently, I shared a vision of the direction I was taking. And that was to build a minimum of $700,000 of capital producing assets in 10 years. Now, the first step towards achieving any substantial goal is to have a detailed plan on how the goal will be achieved. Every successful business has a business plan. So should you.


 

You’ve got to be very careful if you don’t know where you’re going, because you might not get there. If you don’t know where you are going, you will wind up somewhere else.” – Yogi Berra

Every investor should have an Investment Policy Statement. Why? So you know where you are going. It acts as a reference point. A candle to guide you through the darkness. It’s a sacred creed that you developed through intensive thought, reflection, logic, and rationality; it guides you so you don’t stray from your path to success.

What’s ours? Here is the simple breakdown:

LIQUIDITY

Assets will always be available for liquidation anytime, anywhere.

Liquidity is the iron rule. That means that we structure our investments so that they meet this requirement. It means that we consciously choose to avoid investments that have any type of strict lock in periods. This does not hinder us from stock investments.

FOREVER

Our investment time horizon is forever.

Our investment time horizon is forever. Stock investments will be approached with this timeline especially in mind.

HALF NET

“Minimum of 50% net income saved.

We will strive to put away a minimum of 50% of our net income while we work in our current careers. Based on very conservative projections (5% average annual returns over 10 years), investing 50% of our net income for 10 years should get us to $700,000 in capital producing assets.

ASSET ALLOCATION

Maximum 80% stocks.”

We will always hold a portion of our assets in cash/cash-equivalents. Both for peace of mind and for the unlikely chance a truly “home run” investment opportunity presents itself.

TAX OPTIMIZATION

Investments will be fully optimized for tax efficiency.”

Investments will be allocated to appropriate tax sheltered and non-tax sheltered accounts for efficiency and optimization. This means all US equities will reside in RRSP accounts. All foreign equities, REITs, and growth stock will reside in TFSA accounts. All Canadian equities and Canadian dividend stocks will reside in regular, non-tax sheltered accounts. All cash will be held in high interest savings accounts in non-tax sheltered accounts.

These 4 major points make up the foundation of our plan. It’s meant to provide us with a road map based on our values and beliefs without sacrificing flexibility. What’s in your Investment Policy Statement?

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  • I have been investing in Real Estate and some equities, mostly index ETFs. I am going to pay off a mortgage next week, so some of my investment will be for that. No sense paying 5.5% interest anymore.

    • Kapitalust

      Real Estate is an asset class I’m not totally all fond of. Don’t get me wrong, do it right and you can make great gains in appreciation and stream of cash via rentals, but I still prefer solid companies. I need to read some more on RE!

  • Let me just copy this statement to my own blog… This is a much better written version of what I had in mind myself as a way to reach financial independence!

    I’m also not interested in real estate. It’s too much of a hassle to me and prices are way too inflated in Belgium for it to be profitable at all. On top of that, the federal government is looking to tax ownership of multiple estates more.

    • Kapitalust

      Haha inflated prices over here in Vancouver too! Probably why I’m not very much interested in RE. In Canada, there is a capital gains exemption on your primary residence but not on additional property.

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    • Kapitalust

      Thanks for the heads up, got it fixed!

  • I’m not against RE at all just haven’t ventured into that arena yet. I have to agree that I think RE is a much more hands on asset class than dividend stocks and while any investment requires work, research and constant assessment I feel the level of higher with any RE asset class. Thanks for sharing.

    • Kapitalust

      I agree that I think an aspect I don’t find too appealing is the “hands on” approach with RE. I’d rather just buy REITs and get my RE exposure that way than managing a rental property.

  • You might want to re-consider only putting REITs in a tax-sheltered account. Many reits use accounting measures to ensure the distributions are “Return of Capital”. Thus, you don’t have to pay taxes on them as they depreciate buildings/assets against the incomes. The catch is that this does lower your cost base, so it becomes a larger capital gain when you sell. Since cap-gains are 1/2 of your margin tax rate, this is a great way to get tax-free cash in your hands on a regular basis, and lower the potential taxation on your return.

    • Thanks for the head up on the ACB calc and the edge in ROC over cap gains – learned somethin new! 🙂

  • Here is mine (spruced up as part of the book):
    https://docs.google.com/document/d/1CkoDY8iyJ2s9s3TfjMlHz7RiJxctMdhKBr7QLC2B7Iw/

    Re: REITs, on the flip side, putting them in a tax-sheltered account can help spare a lot of accounting to follow all that RoC 😉

    • Well that was the reason I had earmarked REITs to a tax-sheltered because I didn’t want to have to track ACB and ROC – but I’m curious to see how much of a benefit it would be as HHA mentions. Will have to do my own research/hw and then see if the difference is worth it.

      I’ll check out yours right now!

      • I think it depends on what you’re doing with the distributions. If you’re just reinvesting them anyway then the tax deferral doesn’t really help you vs something else providing capital gains without a dividend. If you need to use the cash flow though, that’s a different story.

        • Interesting – thanks for the rule of thumbs on how to approach REITs in taxable vs. tax sheltered vis a vis cash flow needs!

    • I really like it! I’m probably going to draw from it to revise our own a little bit. Love the structure and the way you’ve set it up 😀