My Investor Policy Statement

Hi RIP friends,

Facilitated by some recent extra time purchases, as promised to myself (and publicly committed), I’ve finally allocated time last weekend to redact my IPS.

image: physicianonfire

What’s an IPS? IPS stays for Investor Policy Statement, essentially an investing guideline you define for yourself that helps keeping you on path when situations may trigger your instincts. The market crashes? You have a money surplus? You’re having kids? You lost your job? They say this year Emerging Markets will rock? What did you write in your IPS for those cases?

I wanted to write it down after having read this amazing post on PhysicianOnFire several months ago. I strongly recommend you write your own if you’re going to invest money (and you should). Btw, invest 5 minutes of your precious time and go read PoF post.

One of the first rule of investing is “define your goals, priorities and strategies”, that’s almost all an IPS is about. The level of details of your IPS should match your desired complexity level. A too detailed IPS may end up being edited too frequently or going soon out of sync with reality. A too generic IPS is mostly worthless. I use the CV rule: it should never be longer than 3 pages.

In writing your IPS you’ll be challenged to think about your values, your long term strategy and your exit strategy. You’re forced to ask yourself if you really understand what you’re investing in and why you’re investing in such categories and specific assets. You may start researching and gathering more information, refining your asset allocation and diversification strategies and, if you’re a nerd like me, you end up engineering your lifelong economic algorithm.

I chose to make mine a little bit longer than I’m comfortable with (whaaat? 5 pages??), since I wanted to embed in it my FIRE algorithm too.

Enjoy!


Mr. RIP Investor Policy Statement

Terminology
NW = Net Worth
WR = Withdraw Rate
SR = Saving Rate
FU = Target NW to call it FI

Objectives

  • Reach FI (NW >= FU) before age 45, i.e. before year 2022.
    • FU = 30x yearly expenses (desired WR = 3.33%).
    • Yearly expenses to be estimated not based on current ones but considering factors like: 1) moving out of Switzerland 2) having 1-2 kids 3) buying or not a house.
    • Once FI is reached, Yearly expenses (thus FU) updated each year based on forecasts and actual spending.
  • Reach 150% FU before age 50.
  • Stay above 80% FU forever, after having reached FI.

Overall Strategy

  • Hard Accumulation” phase while NW < 100% FU.
    • Save at least 50% of income (SR >= 50%).
    • Save at least 50k EUR each year.
    • It’s ok to not go beyond if it would impact well being (80% or even 60% is ok if previous 2 conditions are met).
  • Self Sustainability” phase while 80% FU < NW < 120% FU.
    • SR >= 0% – Don’t touch the principal, keep working sporadically or find other ways to bring money at home to cover for expenses and let the principal grow.
    • Note that between 80% and 100% there’s a so called hysteresis: keep behaving according to the rules in current state.
    • Below 80% (Oh Crap percentage – cit LivingAFI) restart accumulating (probably via frugality and hustling more).
    • Below 60% (Oh Shit percentage) get back to work unless some form of social security is triggered or I am above conventional retirement age.
  • What’s income?” phase while NW >= 120% FU.
    • make all work and income decisions as if the wage were 0 – cit MMM.
    • Stop caring about having to earn money, It’s ok to withdraw from the principal.
    • Stay in this phase while NW > 100% FU (hysteresis between 100% and 120%).
  • What’s money?” phase while NW >= 200% FU.
    • make all spending decisions as if the price were 0 – cit MMM.
    • Stop caring about budgeting, expenses, earnings. Just avoid plain stupidity.
    • Stay in this phase while NW > 150% FU (hysteresis between 150% and 200%).
    • Note that the FU% will decrease if yearly expenses increase.

Investment Philosophy

  • Invest mainly in stocks (>50%), secondary in bonds (<30%), maybe real estates (<15%), might consider p2p lending or angel investing.
  • Max out stocks investment at 100% FU. If my asset allocation says 60% stocks, once that 60% NW = FU (NW = 166% FU) then don’t over-invest in stocks, take extra money out of market ready to be reinvested in case of market drop.
  • Buy and hold stocks strategy.
    • stay invested (extra invest if possible) if the market crashes.
  • Stay low on costs in the “costs vs efforts” spectrum.
    • No individual stock picking (super low costs, high effort).
    • Yes Manually diversificate among regional Index Based ETFs: US, Europe, Emerging, Pacific (low costs, medium effort).
    • No world ETFs (medium costs, low effort).
    • No robo-adviser (high costs, zero effort).
  • Avoid investing in specific sectors (like “travel”, “consumer goods”, “technology”, “banks”).
  • Accept territorial home bias, i.e. invest heavily in the market where I live.
    • To keep up with local currency inflation and economic situation.
  • Avoid professional home bias while in accumulation phase (avoid “tech” investments).
    • To diversificate, i.e. avoid making a tech industry crash a double loss.
  • Optimize for tax efficiency over small variations (<0.2%) of costs (TER).
  • Prefer Distributing over Accumulating ETFs given same costs and tax conditions.
  • Don’t do DCA (JL Collins).
  • During accumulation phase, keep investing each month.
    • Use the monthly investing to rebalance.
    • Keep track of real vs ideal for each asset and throw money to assets that need the most.
    • To reduce investing trade costs, define an investing quantum and never invest amounts smaller than the quantum.
    • Forego monthly investment to cover large expenses (travel, vehicles…).
  • Once every 6 months do a major rebalance between asset classes and within each class.
    • Keep in mind the “no stocks above 100% FU” rule (and that 100% FU changes over time since actual yearly expenses and forecasts change).
    • Use this major rebalance to review this doc and eventually improve/change it.

Asset Allocation

  • 60% Stocks
    • 25% – Europe Large/Mid/Small (STOXX600).
    • 25% – US Stocks: 20% Large (S&P500), 5% Small.
    • 5% – Pacific.
    • 5% – Emerging Markets.
    • I allow myself to go on a slightly different route while in accumulation phase.
  • 25% Bonds
    • Pension Pillars (once left Switzerland these will disappear).
    • Government & Corporate Bonds (mainly local market).
  • 15% Real Estate
    • Primary residence.
    • Eventual rental properties.

Cash

  • Keep 2-6 months of living expenses in cash while working.
  • Keep 12-24 months of living expenses in cash while not working.
    • Consider cash an asset class that needs to be rebalanced every major cycle.
  • In case of urgent need of cash in bear market, sell bonds first.

Other Considerations

  • While in Switzerland, maximise tax deductions via Pillar 3a and Pillar 2a buy-ins.
    • Check the cantonal limit up to which a Pillar 2 buy in is not locked for 3 years.
  • Don’t take into account social security and pensions at regular retirement age.
  • Don’t take into account expected inheritance.

Supporting Family Members

  • Support eventual children.
    • Pay for their education till Master’s Degree.
    • Don’t give them paychecks but make them work for the household and earn money.
    • Teach them financial skills (spend less, earn more, be frugal, save, invest, be free).
    • Encourage them to be independent and leave the nest as early as possible.
  • Support other family members (parents, siblings).

Preparing my finances for my expected death

  • Aim to leave a significant portion of inheritance for a greater good.
    • Angel investing.
    • Charities.
    • Projects I care about (going to Mars?).
  • Aim to leave enough to my children and eventual surviving spouse.

Preparing my finances for my unexpected death

  • Make a will to make sure my assets are handled as I wish.
  • Have a life insurance after work’s one will expire to make sure my family won’t have financial issues.

Open problems

  • Given that most probably we’ll retire in Italy, understand investments opportunities and tax implications there.
    • Check income, dividends, capital gain and wealth taxes.
    • Check rental properties business.
    • Check freelancing / launching a company complexity and costs.

since this post won’t be edited much while my IPS will, I’m linking here a live version in Google Docs for those who want to follow how my IPS is changing over time. Here’s the link.

What are you waiting for?

Go write your IPS!

11 comments

  1. Have retired, kids grown up, still saving….
    Quite worried about the long term impact of inflation, though. We’re spoiled at the minute with the low inflation rate. If it suddenly jumps to 15%+, (as in the 1980’s), my pension stops increasing at 3% p.a., so investments will need to fill the gap. 3% withdrawal rate might not be enough.
    Agree about having a will, also ‘power of attorney’, where you enable someone else to make decisions on your behalf if you are incapacitated.

    1. Investments (both stocks and bonds) are a good edge against inflation. Real estate too, actually.

      That’s why I suggest to don’t care about home bias and not exaggerate with cash

  2. Pretty thourough setup and we are pretty much on the sam page. However, as for cash, personally would bring down percentage to around 2 months tops (1 would be better). Also during FI, sell bonds if you have to, at least that way you will have maximum return on investment of your assets. Cash does not do anything, which is a waste and kind of a sin from a FIRE perspective.

  3. Excellent post with a goos basis for everyone that needs a investment plan, statement, guideline. Most of it applies directly to us as well.

    I do have a world ETF. I would consider switching to regional ETSas there are options available on the major US indexes. Other than that, I am happy with my world ETF.

    I do consider a roboadvisor as soon as they become really cheap. Right now, too expensive for me.

    1. My problem with roboadvisor is twofold: high costs and no control over which products are being purchased. I read articles about roboadvisor buying “sponsored” ETFs you wouldn’t buy in the first place.

      Anyway, I read few articles about options and I may want to learn more. I saw you’re an expert in the field. Any recommendations for starters?

  4. Nice article, I’ll certainly be writing up my own version before the next rebalance. One thing stirred my curiosity: why do you say “Prefer Distributing over Accumulating ETFs given same costs and tax conditions”? I was actually thinking to myself that I would choose accumulating so as to automatically reinvest the dividends, so I’m curious regarding your reasoning, in case it might my upcoming investment decisions.

    1. Hi Pedro, thanks for stopping by 🙂

      I prefer Distributing over Accumulating – though I only own distributing – for two reasons:
      1) If the ETF is domiciled in US with Distributing and DA-1 form you can get back the 15% US withhold on dividends that’s otherwise lost with accumulating (the fund itself pays taxes, not the shareholders)
      2) I like the idea of “income from assets”. I can reinvest if I want, but I could also live off of this income.

        1. 2 more reasons:
          3) if your ETF’s strategy is accumulating, in Switzerland, you should double check that your ETF is listed on ictax (https://www.ictax.admin.ch/extern/en.html) else the whole capital gain may be taxed as income.
          4) Distributing ETFs, being simpler from an algorithmic point of view, usually have slightly lower TERs (in the order of few basis points though)

          1. I was making the listing on ictax a prerequisite for the choice of an ETF, just to avoid any future complications, but good to know about a specific reason.

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