Investment Policy Statement Construction
Many investors, retail and institutional, are unfamiliar with a formal investment policy statement. However, it is wise to look beyond quantitative, and often contrived scores and categories that establish primary and secondary goals for investment objectives and risk tolerance. These scores or ratings are necessary, especially for establishing the legal bounds within which a fiduciary will operate for a given client. However, it is instructive for the client to state in plain English what he is trying to accomplish with a given sum of capital. Very often the client objective can be reduced to a particular project with a finite life, given a specific financial need. Too often investors ignore their tangible needs, for in favor of some abstract term of art that may not have a basis in practical reality. For example, a client may set aside an amount of money with the intent to leave it and it's returns untouched for 10 years. Based on the client's age, financial situation and risk tolerance, it may be agreed that a growth oriented investment objective is prudent. But such an objective fails to pinpoint details that may allow the client to undertake less risk and still achieve his goal. For instance, very often, a business owner has a tangible goal to achieve by a certain date, say buying out his business partner by a certain time. It may turn out that with the capital base placed under our stewardship, the client does not need to make as high a return as is warranted by adopting a growth strategy, and can therefore take on less risk that his time horizon and risk tolerance would suggest. When possible, we work hard with both our retail and institutional clients to precisely determine the tangible outcome that we are being asked to help achieve. The investment policy statement memorializes this endeavor. |