Personal Investment Policy Statement – What You Need to Know

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I first heard about personal investment policy statements on the ChooseFI podcast; episode 097 to be exact.  Prior to that, I had no idea what a personal investment policy statement was, or even that people had created their own.

Because my curiosity was piqued I began to research what this personal statement was and why it was important to have as an individual investor. 

Personal investment policy statements are beneficial to have in good economic times and can become a necessity for keeping emotions in check during economic downturns or recessions.  With the current economic situation, a clear personal investment policy statement can help you steer your financial ship through the storm.

What is a personal investment policy statement (PIPS)?

A personal investment policy statement is a clear outline of who you are as an investor and the type of investing you do.  PIPS is like a contract with yourself clearly stating your investment goals and how you plan to achieve them.  It can be created individually with your family or with the consultation of a fee-only financial advisor.

In turbulent economic times, like what we are currently experiencing, creating a personal investment policy statement can be more difficult because of market influencers. But more difficult does not mean impossible. With a clear outline and guiding questions, a sound financial plan can be created in any economic environment.

How to Create a Personal Investment Policy Statement?

There are four main components to PIPS.  First you will want to determine what your goals are, then clearly outline your risk tolerance.  When you know those 2 things then it is time to come up with an overall financial plan to achieve your gaols.  Lastly you will want to set up some form of monitoring to see if the plan is keeping you track.

But this does not have to be hard – momma you got this. Make it as simple or as complex as you want it to be.  My suggestion is to start simple and evolve from there as you become more comfortable.

Determine Your Goals

Where do you see yourself in a year from now? How about in 5 years? 20 years?  Do you have debt you would like to pay off?

Another way to determine your goals is to visualize what your ideal day looks like. When you know what the end is, then it’s time to reverse engineer how to get there.  What sort of things are holding you back from your ideal day and living your ideal life?

Try not to get overwhelmed with this step.  You can always come back to your goals and re-adjust them.  The important step is to take action – no matter how small.

What is Your Risk Tolerance?

Risk tolerance relates to emotion and time and will guide your investing strategy.  

Someone with a high-risk tolerance will invest very differently than someone with a low-risk tolerance.  The same can also be said for the difference in investment strategies for someone who has 40 years ahead of them and someone who is looking to draw from their portfolio in the next couple of years.

The easy part of outlining your risk tolerance is outlining your investment time frame.  Once your money is invested, how long will it be before you will start to need that money and drawdown from your portfolio?

The more difficult aspect of risk tolerance is emotion. Determining your risk tolerance is about figuring out your comfort level with investing and how the markets fluctuate. It is very difficult to predict exactly how you will react to various market conditions.  

Personally, I have always been happy with a minimal emergency fund because we had an emergency plan.  With the current global shutdown, I have realized that I’m much more comfortable with a larger emergency fund.

Write Down an Overall Financial Plan

Now that you have determined your goals and risk tolerance it’s time to write down how you will get there.  This step may require research into various investments or finding the right financial advisor to work with.  

Don’t get overwhelmed with all of the investment options out there.  When we first started investing we took on online course explaining the stock market and were completely confused.  This was one of the reasons we decided to invest in real estate – it was something we understood.

If you are just starting out on your investing journey I highly recommend JL Collins’ stock series or his book A Simple Path to Wealth.  JL explains things in an easy to understand manner and will help give you the confidence to take action.

How Will You Monitor Your Plan?

The final step to your investor statement is to monitor your plan.  This doesn’t mean you have to be checking in on your plan or investments every week.  Momma, who has time for that?  But it does mean that at least annually you should schedule a time to review your plan.

This review phase could be by yourself or with the help of your financial advisor. Create a reminder in your calendar to check in on your plan once a year.

Monitoring your personal investment policy statement could mean checking your asset allocation to make sure it still aligns with your risk tolerance.  It could also be as simple as updating your net worth statement.

Another great time to check-in and monitor your plan is if there is a change in the economic environment.  An example of this would be right now during this pandemic. 

Personal Investment Policy Statement Example

Hubby and I often talk about money and our investments.  It helps to have someone to bounce ideas off of and act as a sort of checks and balance person.  

Years ago we created a plan for our investing and saving without knowing that it was a personal investment policy statement of sorts.  It is not written in stone and often changes and adapts based on our life situation at the time.

Full disclosure, prior to this current pandemic, we had more of a rough draft investment plan than a clearly defined and written down personal investment policy statement.  I am now going to write down our plan to share it with you.

The Statement

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What are my goals?

Our current priority is to pay off our mortgage.  We previously lived for 5 years without a mortgage and the options and freedom provided are tough not to desire.

That being said, we are also contributing to our retirement accounts for both net worth building and the tax advantage it provides.  Because of our real estate income without contributing to our RRSP’s we would have a large tax bill at the end of the year.  Been there, made that tax mistake, never again.

The long term goal is to be able to walk away from our full-time day jobs in order to work for ourselves.  This would give us more freedom to spend time as a family and pursue various passion projects.

What is my risk tolerance?

In some ways we are very risk-averse and in others risk doesn’t seem to bother us.

Let me explain. Paying off our mortgage early is a very conservative investment, so much so it’s not even an investment. But it is something that will help us sleep at night so the psychological benefit trumps the monetary one. 

On the other hand, our self-directed RRSPs are currently invested in 100% equities. This is the opposite of risk-averse.  We believe that the market fluctuates but over the long term always trends upwards.  The potential upside of 100% equities, in our minds, far outweighs the downsides.

Overall Financial Plan

Our financial plan revolves around saving and deploying our savings.  We have created a budget that enables us to live well below our means.  Every month, any “extra” money we have gets transferred into our EQ Bank high-interest savings account.

Then every 6 months we deploy that money either onto our mortgage as a lump sum payment or into our other investment accounts. As we currently still have contribution room in our RRSP’s that is our current investment vehicle of choice due to the tax advantage it provides us.

Financial Plan Breakdown

  • Save extra money every month and transfer into a high-interest savings account
  • Every 6 months transfer savings towards a financial goal
    • 1 transfer to mortgage
    • 1 transfer to investment accounts
      • Investment accounts – first priority is RRSP, then TFSA, then brokerage account
      • Investments are in ETF’s 

Once our mortgage is paid off and the portfolio is built up, one of us can leave their day job and begin to draw down from our RRSP’s.  This will act as income for one of us and can be either re-invested in our TFSA’s, if we have room, or put towards our rental property mortgages.

Due to the size of our rental property portfolio we plan on being in a higher tax bracket by the time we reach traditional retirement age and the mortgages begin to be paid off.  This is the reason we will be drawing down from our RRSP’s early and using it to bridge our income.

How do we monitor our plan?

We are committed to semi-annual net worth statements as well as regular monitoring of our mortgage pay down.  In between these net worth statements we log into our investment accounts to see how they are doing.

I would be lying if I said we never check our investment accounts.  Calculating their totals and monitoring their growth is a total vanity play. It feels good to see the number increase, less good to see a decrease.

Currently our plan is in a bit of a set it and forget it mode.  This will change when our mortgage is paid off.  At that point we will re-evaluate our plans and make changes accordingly.

Everything you need to know about personal investment policy statements

Final Thoughts

Even though it is difficult to predict our emotions, having something in writing can really help prevent emotional decisions.  A written investment statement can serve as an anchor during tough economic times.  

When you find yourself about to make an emotional decision go back and review your statement for guidance on how to proceed.  Stay the course and only make course corrections after the emotions have passed and you are in more stable waters. 

Our personal investment policy statement is a work in progress, it is not something that we come up with one time and never revisit. That doesn’t mean that when the markets crash (or sore) we are going to completely throw out our plan and jump on (or off) of the investment bandwagon. 

But it does mean that as our season of life evolves we can make changes to adapt to our circumstances.  Our goals will pivot once our mortgage is paid off (again).  That is one strength of our overall financial plan – it’s flexible.  We continuously revisit it and make changes to adapt to our current life situation.

If you do not have a personal investment policy statement, then it may be a good time to start having conversations with your partner/family.  The first step is always determining what your goals are because knowing where you are going will help you decide how to get there.

Keep things simple and just make small steps.  It’s not about getting things perfect but rather about taking action.

What about you, do you have a personal investment policy statement?

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6 Comments

  1. This has been on my to do list for a while … An informal policy resides in my head – need to get it down on paper! Thanks for the reminder

    1. Maria says:

      Latestarterfire – we could all use a reminder sometimes. This has been something that we had but never really wrote down until recently. The current economic events really motivated us to have a solid plan.

  2. This is similar to an investment contract in the Intelligent Investor book, but I guess this Personal Investment Policy Statement is more geared towards personal finances.

    I couldn’t look at my finances just once a year (haha!) I’m just too obsessed with them/ find it fun to look at.

    1. Maria says:

      GYM – I have never read the Intelligent Investor Book. I will have to check it out from the library once it opens up again. We definitely look at our investments more than once a year, just don’t track them as close. With a large portion of our portfolio in real estate, there isn’t too much fluctuation from month to month.

  3. Stuart says:

    This is an excellent article. Thank you for motivating me to write my investment plan down on paper this evening.

    1. Maria says:

      Thanks for reading Stuart. Writing down your plan on paper is a great step. It sounds like you are like we were and had a bit of a plan but had never written it down.

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