In Parts 1-5 of this series, we have walked through the complete set of steps that I have used to develop my investment strategy. For information about this process, click on any one of this links below.
In Part 6, we will walk through the steps of summarizing what we have decided upon and place it in to what is called an Investment Policy Statement.
Step 6 – Specifically List the Target Percentages of Assets You Wish to Allocate to the Following Categories
- Overall split of your portfolio between fixed income and equity investments – determined in Part 2
- Overall split between international and US domestic equity investments – determined in Part 4.
- Specific % breakdown of the specific mutual funds that will make up your portfolio.
Once you have listed out your targets/goals, you can then locate each mutual fund in either a taxable or tax-sheltered account, depending on where it is deemed to be most tax-efficient per the My Money Blog – Mutual Fund Location Guidelines.
Step 7 – Portfolio Rebalancing Ranges
For each of the three categories above, list out the specific % ranges that you will allow price fluctuations to occur before you rebalance your portfolio.
The recommended rule to follow for figuring out when to rebalance is the 5% rule. This means that you should rebalance when price fluctuations cause the current % allocation of an investment category to be greater than +/- 5% off of your target allocation.
For example –
- My overall equity/fixed income split is 75 / 25%. Therefore, I would rebalance at this high level if my equity or fixed income allocations are outside the ranges of 70-80%, and 20-30%, respectively.
- My equity split is 29% international / 71% US domestic. Therefore, I would rebalance at this level is my international or domestic allocations are outside the ranges of 24-34%, and 66-76%, respectively.
Once you have listed the information in Step 6 and 7, you have now created your Investment Policy Statement! Congratulations! The link below shows the Investment Policy Statement I have created.
Step 8 – Monthly Review
Next, you will want to put a reminder on your calendar to review your Investment Strategy/Policy statement above each month in order to track your asset allocation percentages, and make adjustments as needed.
The page where I post my monthly portfolio review can be accessed at the link below.
Step 9 – Yearly Review
Along with the monthly review, you will want to place a reminder on your calendar to go through Steps 1-9 one time per year to make see if your cash needs, risk tolerance, or financial situation has changed significantly enough to warrant adjustments in your investment strategy.
I hope this series has been helpful for everyone to develop an investment strategy that is best suited for your individual needs/situation. If you have any questions, please don’t hesitate to ask.
Keep on learning!
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