The recent $GME short squeeze and the associated frenzy of activity with novice investors shoveling their money into GameStop, AMC, BlackBerry, and other struggling businesses was a stark reminder of how important creating an investor policy statement is for retail investors. 

An investor policy statement does not need to be complicated. In fact, I prefer the simple one-page version I now rely on because I can print it out and use it as a quick reference whenever I start to feel FOMO creeping up on me. Using this technique ultimately saved me from myself recently and I avoided buying $GME during the peak of the mania and getting left holding the bag when the inevitable sell-off happened. The controversial trading halts placed by multiple brokerage platforms on the hot meme stocks had no impact on me because I stayed out of it. This strategy also kept me out of trouble with the crypto bubble a couple of years ago. (Seriously, I had Coinbase ready to go before I deferred to my policy statement, which was written by my more rational self and decided to walk away.)

As the trope goes, a successful investor has to be right three times. The right investment needs to be chosen and the timing of the purchase and sale of that investment must be right. I know that I can devote a sufficient amount of time to picking good, low cost, index funds and then continue to hold them for years until I begin to execute my withdrawal strategy. There is simply no way I could ever guarantee I could devote my constant attention to fluctuations in a specific meme stock to make sure I got the buy and sell timing right (if that’s even possible). If you have a full time job, especially as an attorney, or a family, it is highly unlikely you can devote that amount of consistent attention either. The last thing I want is to lose my shirt because I had to get a brief filed or because it snows and I decide blow off a virtual department meeting to go build a snowman with my daughter.

My investor policy statement is much less technical than some samples you may see floating around the web. I chose to keep it very simple and to focus on the core questions of who, what, when, where, and why. A simple plan is easier to execute.

The Who.

Who are you investing for? This can be deceptively tricky because it forces you to be brutally honest with yourself. Do you have enough time horizon left to invest for your children’s college expenses? Do you philosophically want to pay for college? Do you actually care about leaving legacy money for your unborn great grandchildren? There is no wrong answer but this is a question worth pondering in the context of a larger financial plan as well.

The Why.

This can be as lofty or as practical as you want it to be. Some possible goals include:

• To retire by age x with $x of available assets;
• Improving security and risk associated with your profession;
• Meeting capital needs at retirement, death, or disability;
• Securing the financial futures of heirs; or
• Charitable giving.

It can help to provide some specific targets here but I don’t think a really detailed expression of goals by the numbers is necessary. That is something that should be included in a much more comprehensive financial plan. Again, the point of this policy statement is to remind yourself why you have decided to commit to your particular course of action for the long term.

The What.

This is where you can start to lay out some of the nuts and bolts of your strategy, general investment philosophy, and asset allocation. Personal Capital has good tools for assessing your risk tolerance and developing an appropriate asset allocation. It will also plot your current portfolio on the efficient frontier, which is a very nice feature. Portfolio Visualizer is also a very powerful tool for developing an asset allocation on the efficient frontier.

As you can see, the portfolio in the sample policy below could use a small bit of tweaking around the margins.

If you don’t want to spend the time developing a custom asset allocation, you can always decide to invest in a Vanguard target date fund or follow JL Collins’ Simple Path to Wealth and just invest in a total U.S. stock market index fund like VTSAX or SWTSX. 

Another simple two-fund asset allocation is to simply subtract your age from 100 to arrive at your bond allocation. So, a 30 year old would choose 30% in a total bond market fund and 70% in a total stock market fund. That is a very conservative approach but works for a lot of people.

The What Not.

This is arguably just as important as deciding what you will invest in. The sample below is designed to completely put the brakes on any speculative investing or frequent trading. If you want to dabble in riskier bets with a satellite portfolio, be sure to articulate the maximum amount (e.g., 10% of invested assets) you will gamble with in your policy statement.

The When.

The answer to when you will invest depends, in large part, on your pay structure. A W-2 associate or non-equity partner can easily choose to contribute to investment accounts with each pay period. The timing of contributions for partners can get more complicated. The key here is to articulate generally when you will invest your money.

The Where and How.

This is where you identify the actual mechanics of where your money is coming from and what investment accounts that money is being deposited into. This might seem like an unnecessary thing to identify but, having it written down will help you resist the urge to throw a year-end bonus into crypto (assuming that is not what you planned—to each their own). This is also the place to note when you plan to rebalance.

Below I have included an example investor policy statement that can be used as a general template. I recommend printing it out and keeping it with your financial plan or saving it to your desktop. The point is to keep it readily accessible so that you are able to reference it occasionally.

Investor Policy Statement

Who am I investing for?

I am investing for myself, my spouse, and my child.

Why am I investing?

I am investing to provide for a secure retirement and long-term financial security for my spouse and I. I want to have sufficient assets to produce a reliable source of retirement income based on a 4% inflation adjusted annual withdrawal. I am also investing to provide an undergraduate education for my child.

What am I investing in?

I will invest in low cost index funds that mirror my ideal asset allocation for high growth on the efficient frontier. That allocation is:

• U.S. Bonds: 2.5%
• International Bonds: 1.5%
• Total International Stock Market: 25.5%
• U.S. Total Stock Market: 60.5%
• REITs: 10%

This allocation yields an expected return of 10.93% with expected volatility of 13.39%.

What will I not invest in?

I will not invest in purely speculative assets or stocks. I will not invest in any assets for which I do not have a high degree of knowledge. And, I will not invest in any new assets or stocks without waiting a minimum of 14 days.

When will I invest?

I will invest every pay period and with any windfalls, including bonuses and tax refunds.

Where will I invest?

I will invest in my workplace 401(k) plan up to the maximum. I will invest in my HSA account up to the maximum. I will invest in a backdoor Roth IRA contribution up to the maximum each year. I will invest any additional funds into my Vanguard taxable brokerage account.

How will I invest?

I will have my 401(k) and HSA funds automatically withdrawn from by paychecks. I will make Roth IRA contributions with my annual bonus and will transfer any remaining or additional windfalls to my brokerage account within 48 hours of receipt.  I will rebalance my portfolio across all of my accounts twice a year in mid-February and mid-November.