Hi RIP friends,
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 rules 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.
Mr. RIP Investor Policy Statement
NW = Net Worth
WR = Withdraw Rate
SR = Saving Rate
FU = Target NW to call it FI
- 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.
- “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.
- 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 time” to review this doc and eventually improve/change it.
- 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.
- 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.
- 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.
- 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.
- 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!