Investment policies


Investment policies are entered into between you and a financial advisor. They establish the guidelines and guardrails for your investments. They are created in times of peace to help automate decision-making when shit goes pear-shaped.

It’s possible for you to play both the advisor and the client, you are multifaceted. The difficult part is that sometimes these two facets need to be at odds with one another. Advisors, like mentors (or sometimes coaches), need to be willing and able to ask powerful, and sometimes tough, questions.

An investment policy should outline the why, what, and how for you.

When it comes to finances, related to saving and investing, a prototypical why has two sides:

  1. I want to be able to live a fulfilled life.
  2. I want to, at some point, be able to do what I want, when I want to do it.

On the one hand we have a joyful life now. On the other we have a joyful life in future. These two things can sometimes be at odds with one another. Further, it is difficult for most of us to imagine a future 10, 20, 30, or 40-plus years from now.

The escalator is the problem. Or, more appropriately, the story of the escalator is the problem; the dark side of continuous improvement.

During the primary school years it’s getting good grades, showing up on time, following the rules set forth by an external force; the school. During the secondary school years it’s everything from the elementary school years and the reason is to either get a good job after graduation or to be able to get into a good college. The why behind the journey from childhood to adulthood is to reach the next milestone; good job, good school, a productive member of society, or a combination. These are often called investments for your future.

It can feel like we’re always making investments for our future and never living in the here and now. It can feel like YOLO and FOMO are in a battle with the belief that, “I’m gonna live forever.”

An investment policy can help you to put these things in balance.

Budgeting is more in the YOLO and FOMO space. Investing is more in the living forever space.

The investment policy is a strategic document to help establish guidelines and guardrails for your financial future. It’s important it be written down because it will be an anchor for you to visit when shit goes pear-shaped, because things always go pear-shaped.

Your why

Section titled Your why

This is the why space.

Why are you doing this saving and investing thing in the first place?

The easy target as it applies to most of us is FI. The breakaway point from where you’re earning a living at anything to pay the bills and being able to work whenever you want to, because you have enough to pay the bills and them some.

A simple match equation seen quite a bit is to take your annual expenses and multiply by 25; this is often referred to as a FIRE number. How much you need to never work again.

This presumes you will maintain a similar lifestyle to the one you have now. It also presumes you’re putting your saving and investment your money somewhere that allows for a four percent withdrawal rate indefinitely. It also presumes that inflation will remain roughly the same. For many of us, this number can seem unattainable.

There’s also Coast FI, which means if I plan to retire at some age, say, 67 with my current lifestyle presuming all the things from the FIRE number, how much, per month I can save and invest, and my current age, say, 30. Running this through a calculator will tell me at what age, say, 40 I will have saved and invested enough money (the Coast FI number) to have that grow to my FIRE number by the retirement age without saving or investing another dime.

There’s also what I call a Coast FI Stack, which starts with a Coast FI number using the oldest you are comfortably saying you will retire by. Then we reduce the retirement age by two-to-five years, say, 65 and use the age at which we should hit the first Coast FI number, say, 40. This should give us a different age, say, 42 and a different Coast FI number.

Then we keep doing this until to the two ages are essentially the same. This creates a map with milestones by age and dollar amount. So, we minimize the overwhelm of the FIRE number while opening up the possibilities of it happening sooner than we thought.

Like I said, financial independence is the easy target for the why of saving and investing, but it doesn’t have to be the only why, in fact, it probably shouldn’t be. Beyond the freedom, what are you running toward? Make a list.

What you might find is that some (if not a lot) of the things you are running toward you don’t need to wait until you’ve achieved FI.

For the next few sections, you can look at my investment policy; I used the one from The White Coat Investor as a base and will modify it as I continue on my journey.

Financial goals

Section titled Financial goals

How much do you want to save and invest? How much return are you looking for? Target net worth, with a date?

Savings and investing

Section titled Savings and investing

For a description of the difference between saving and investing for our purposes, check out the main finances page.

I get a dollar. If I put it in a bank account and don’t spend it, I have saved that dollar. You save 100 percent of the money you don’t spend. However, if I put it in a savings account, it generates income; am I now investing?

All right, I get a dollar. If I use that dollar to purchase an asset that generates income and has some form of intrinsic value in the hopes will be able to spend the generated income, sell the asset for more later, or both then I’ve invested; regardless of how you feel about the saving versus investing linguistic debate.

So, for our purposes, they are interchangeable.

Tax buckets

Section titled Tax buckets

Different account types have different tax treatment in the United States. Some financial planners see three tax buckets based on how contributions and withdrawals are taxed (emphasizing the withdrawal side). The three buckets are:

  1. Tax-free: Funds aren’t taxed upon withdrawal; gains and dividends are not taxed. Typically you can’t take advantage of tax-loss harvesting.
  2. Tax-deferred: Funds are taxed as ordinary income upon withdrawal; gains and dividends are not taxed. Typically you can’t take advantage of tax-loss harvesting.
  3. Taxable: Funds are taxed using capital gains rules or ordinary income upon withdrawal or when dividends are distributed; gains are not taxed until withdrawal. You may take advantage of tax-loss harvesting.

I prefer a four bucket perspective, taking into account how the money is taxed before going in:

  1. Triple tax-advantaged (ex. HSA):
    • pre-tax (or tax-deductible) going in,
    • tax-exempt on gains, and
    • tax-exempt on withdrawal.
  2. Tax-free (ex. Roth IRA):
    • post-tax going in (taxes are paid),
    • tax-exempt on gains, and
    • tax-exempt on withdrawal.
  3. Tax-deferred (ex. traditional IRA):
    • potentially pre-tax going in (I make too much annually to qualify),
    • tax-exempt on gains, and
    • taxed on withdrawal.
  4. Taxable (ex. savings accounts):
    • post-tax going in,
    • tax-exempt on gains, and
    • tax-exempt on withdrawal.

Asset allocation

Section titled Asset allocation

Asset allocation is the proportion of each asset class compared to the value of the overall portfolio. Tax location is related to the tax treatment of funds flowing in and out of the portfolio. Diversification is about choosing asset classes that have low correlation to each other.

I prefer to look at the entire portfolio for this. With that said, I do tend to only include assets that are higher on the liquidity scale.

A liquid asset is something you can exchange for goods and services (or other currency) within a week or less. We all have liquid and illiquid assets.

My cash on hand is very liquid. My credit card is semi-liquid because sometimes you can’t use credit cards. Most share-style securities—stocks, bonds, mutual funds, ETFs, and so on—are fairly liquid. The house you’re living in, not very liquid. The car you drive, not very liquid. In fact, depending on “the market” you can go months before exchanging those assets for cash.

Supply and demand. Scarcity alone doesn’t make something more valuable. There’s only one of me, if there is no demand for what I do, I can’t charge as much. Meanly, some professional speakers can charge over 10,000 USD to deliver a talk that’s less than one hour long. There’s no such thing as intrinsic value, only perceived value.

So, if you’ve already done the chart of accounts thing we talked about in budgeting you should have a list of assets, which means you can determine which ones are more and less liquid.

At a very high level, there are four buckets:

  1. cash (some consider short-term treasury bonds to be like cash),
  2. alternatives,
  3. treasury bonds (usually mid-, long-term or both), and
  4. stocks (also called equities).

You might have collectibles, though those aren’t typically considered very liquid; it’s easier to sell shares in gold-backed mutual fund than it is to sell actual, physical gold. I’d probably lump collectibles into the alternatives bucket anyway.

Put the current value of each asset into one of those buckets of your portfolio. The total value of all the buckets will give you the value of your portfolio. Dividing the value of the individual bucket by the total will give you that bucket’s allocation.

Now, just like the targets in the budget, set targets here as well.

Again, just like the budget bit, this is about transparency and getting intentional if you haven’t already. Is the current portfolio allocated like you want it to be for the targets? If not, how will you rebalance?

Will you buy more of something? Will you sell something? Will you do both; exchange one thing for another? How often or based on what event will you rebalance again?

This is establishing the guidelines for yourself.

The reason I include good and bad times as part of risk tolerance is because it’s about being able to hold the line you’ve drawn for yourself, not just can I deal with a serious drop in my portfolio. Let’s say you have a portfolio and you’ve set the allocations to 10 percent cash and 90 percent equities. You’ve also established that you will rebalance your portfolio once a year. Equities have been doing very well and now account for 98 percent of your portfolio; will you still rebalance down to 90 percent equities and 10 percent cash—or close to it? (A potential negative risk here is that equities could keep climbing and selling now you might miss out.)

Risk capacity is all about your ability to wait to recover from a hit. This ties into thinking about emergency funds as well, which might be easier. If you lost your job tomorrow, how hard would it be for you to find another job that pays the same or is in the same field? The longer it would take, the more emergency fund you should probably carry. Same thing with investments, how big of a drawdown can you absorb and for how long. (Note: There are ways to see how different portfolios fair regarding maximum drawdowns and how long drawdowns have occurred. There are also resources available that describe the cyclical ups-and-downs of various markets over time; in general, not for your specific asset allocation.)

Rebalancing the portfolio

Section titled Rebalancing the portfolio

Rebalancing is the act of selling and buying holdings in a way that each holding is brought back to its specified target allocation.

There are various approaches out there and this should not be considered an exhaustive list:

Never rebalancing is in keeping with ideas of Jack Bogle (founder of Vanguard):

I am in a small minority on the idea of rebalancing. I don’t think you need to do it. The data bear me out, because the higher-yielding asset is going to be stocks over the long term. That’s the way the capital markets work. Not in every 10-year period, or even for that matter every 25-year period. But the higher-returning asset you’re getting rid of to go into a lower-returning asset, so it dampens your returns, and the differences turn out to be, if you look at 25-year periods, very, very small. And sometimes rebalancing improves your returns. Sometimes it makes them worse.

If you are subject to transaction fees, the more you rebalance, the more fees will be applied. Depending on how the rebalancing is performed, there may be tax implications for rebalancing. There’s also something to be said for the “While you’re at it” strategy we’ll get to later because, chances are, you will always be in either accumulation or drawdown mode; never just letting the holdings sit there.

I would say the never approach is the most rudimentary.

Calendar rebalancing is next up in the complexity level (see Investopedia article for more details). Choose your interval and timing within that interval; the most common is yearly, on a specific date. On this day, look at your portfolio and determine what you would need to sell and buy to achieve the desired target allocation.

Back to Bogle who recognizes the psychology of the problem of never rebalancing:

Anybody that feels they should rebalance, I think they should rebalance. I wouldn’t tell them not to. But I’d say, do it in a little more sensible way than it’s done.

I wouldn’t have some formula: oh my God, I’ve gone from 60% to 61%. I better get back to 60%. On a given day, that may happen in these markets. So it should be some range. Say you want to stay close to 65%. If you get below 60%, you can rebalance. If you get above 70%, you rebalance. And you try and not do it not with any great frequency.

Percentage-of-portfolio rebalancing removes the calendar and maintains the targets and ranges from Bogle’s advice above (see Investopedia article linked above). Choose the target and ranges, if one or more of the holdings in the portfolio goes beyond the ranges established, rebalance the portfolio.

Constant Proportion Portfolio Insurance (CPPI) should be done in conjunction with a method that establishes a frequency as this method does not indicate how to decide when to rebalance. There are two “accounts” with this approach: a safety account (risk-off assets, like cash) and a risk account (assets that fluctuate in value more often and dramatically). This method uses a minimal capital floor represented by the safety account (like an emergency fund, for example), the total value of the portfolio, and a risk multiplier to determine a target value for the risk account. For the purposes of math:

x  = maximum risk account balance.
f  = capital floor; minimum balance of the safety account.
ta = f + x; total value of assets considered.
m  = percent above f that x may be.

x = m * (ta - f)

The while you’re at it strategy presumes you will either be putting money into or taking money out of your portfolio (see Nerd Wallet article). When you do, use that as a rebalancing opportunity, even though rebalancing is not the goal.

For example, I have a portfolio set with 90 percent equities and 10 percent cash and I’m in accumulation mode. I’m trying to figure out what to do with 100 USD I just received. When I look at the portfolio I see the percent-based allocation is 92 and 8 respectively. To return the portfolio to balance I need to purchase 88 USD in equities and the remaining 12 in cash. The next time I look at the portfolio, there’s been a dip in the value of my equities and the portfolio is 80 percent equities and 20 percent cash. I have another 100 USD to put into the portfolio and I’ll need to put the full amount toward purchasing equities to bring it back to balance.

The home base approach looks at the whole portfolio (as most of the strategies up to this point have as well; however, it will look at one or more of the tax buckets and accounts as the “home base” for rebalancing.

Let’s say you use a three tax bucket approach and you have money in all three buckets. However, you have more money in the tax-deferred bucket. This may become the bucket you use for rebalancing. You are moving toward a portfolio allocation of 90 percent equities, 5 percent bonds, and 5 percent cash valued at 1,000 USD. Right now you have:

To put the portfolio in balance, you’ll need 900 USD in equities, 50 USD in bonds, and 50 USD in cash. So, you sell 50 USD worth of the equities in your tax-deferred account and purchase 50 USD in bonds.

Note: The benefit of using a tax-favored account for this type of transaction is that you will most likely avoid any tax liability. However, the drawback is that in these types of accounts it’s often difficult (read impossible) to take advantage of tax-loss harvesting.

The satellite (I treat all my children the same) approach looks at each tax bucket (or brokerage account) as a separate portfolio with target allocations; use the same method for each satellite.

A hybrid approach takes aspect of two or more of the above to create an approach that makes you feel comfortable. Maybe you want to rebalance once a quarter using a while you’re at it and CPPI sub-approach, for example.

Emergency fund

Section titled Emergency fund

How do you plan on preparing for and handling emergencies?

Some people say their credit cards are their emergency fund. Others say an emergency fund must be in cash. Some say short-term treasuries are good. I say the important part is the plan and understanding the pros and cons of that plan.

For those who use credit cards it’s not necessarily that the cards themselves are the fund, that’s just what they will use to pay for the emergency; then they will sell other assets to pay off the cards.

Emergencies aren’t things you put off or save for ahead of time, is the argument.

The repeated advice is three-to-six months worth of expenses.

So, look at your budget. Total your expenses for the last three months, that’s what the emergency fund should be. Or, take the average of the last three-to-six months and that’s it. Granted this emergency is really the, “I’ve lost my income” emergency we’re preparing for.

Let’s say you spend 3,000 USD per month. You have an emergency fund of 9,000 USD. Your car explodes. That’s an emergency for you given your current lifestyle. Your emergency fund may not cover the cost of a new car. Or maybe it’s a series of unfortunate accidents that pile on top of one another.


The emergency fund as defined and described by many is the layoff or fired fund. If I get laid off or fired, I have three-to-six months to find another job.

If you’re a high income earner, chances are it will be harder for you to find a replacement job and that high income. If you’re in a niche field or oversaturated field, same thing.

Regardless, we’re looking for the method and madness that will help you sleep at night and involves the steps you’re comfortable with taking should things go pear-shaped.

Debt (and leverage)

Section titled Debt (and leverage)

This is another one of those funny words in the financial space. On one extreme is is taking a loan for everything; the cash-only approach—if I don’t have the cash to buy this thing, I will save until I do. On the other extreme is the notion that, you can’t take it with you and collections won’t matter when I’m dead. Somewhere in the middle is the idea of leverage; we borrow money because there is a future benefit. Somewhere just to the one side is the idea that it’s not actually debt until interest accrues on the money borrowed; credit same as cash, for example.

Where do you fall?

Another consideration is, how will you use debt or leverage?

I believe Archimedes is credited with saying, “Give me a lever long enough and a fulcrum on which to place it and I’ll move the world.” Some investors take on debt to purchase assets they believe will compound faster than the interest rate on the debt. Many people will use a mortgage to purchase a house or a car. The rationale here is that the house or car will afford them the opportunity to earn more or spend less (time or money). Student loans have probably the most air time right now regarding leverage; you are investing in yourself to hopefully gain a higher paying wage.

Some people use credit cards that offer rewards, for example. Beyond that, some offer insurance on purchases. There’s also the idea that if someone steals a credit card they haven’t actually gotten away with cash. While someone taking cash out of your bank may also be contested, with a credit card, the cash isn’t gone.

When it comes to debt instruments there are two broad types:

  1. revolving and
  2. terminal (amortization).

Revolving debt is like credit cards, lines of credit, and so on. The institution agrees to let you borrow up to a certain amount of money at-will; you only have to fill out the paperwork once.

Terminal debt is like mortgages, car loans, student loans. The institution agrees to let you borrow a specified amount of money, at a specified interest rate, for a specific period of time.

In either case, the interest my be variable.

Simple interest loans view principal (initial amount borrowed) and accrued interest separately. The accrued interest is calculated by multiplying the principal by the rate and multiplying that product by the number of periods. With these types of loans payments are typically applied to the accrued interest first, then to the principal. The new principal is then used to calculate future interest accrual. With these types of loans, in the beginning, you pay a lot more toward interest than to principal. This mitigates the risk to the lender toward the front of the loan. If you were to take the total interest that would paid over the lifetime of the loan and do it on a per payment basis, you’d see a lot more interest paid in the beginning than toward the end. For these types of loans, if you can make one or more extra, full payments to loan up front, you could dramatically reduce the term.

Compound interest loans work like savings accounts in reverse. The accrued interest is added to the principal owed. Credit cards usually fall into this category; however, cash advances may be treated as simple interest loans, and you may be required to pay off purchases before payments start going against the balance for cash advances. You borrow a certain amount and interest may not accrue. If you pay the balance off before the accrual period is over, you don’t pay any interest. If you don’t pay it off within that period, interest accrues and added to the total balance of the loan; this new balance will be used to calculate the interest accrued during the next accrual cycle.

How will you treat these types of loans? What targets will you set for yourself regarding different types of debt?

Mortgages also fall under this category, if you have one. What does that look like for you? Will put a certain percent down? What are the guidelines?

Remember, these are your rules to yourself and anyone else helping you with your finances. Part of the hope would be you could hand someone this policy statement and they would be able to handle the saving and investment portion of your finances. (If you also hand them your budget, they should be able to handle the other aspects of your finances as well.)


Section titled Spending

This is the high-level look at the budget. How often will you look at your spending? How will you track your spending?


Section titled Giving

What charities will you support, if any? How do you plan to give? Will it be money, time, a combination, or not at all?

There is no absolute, morally correct answer. This is your world, not the escalator you may believe you’ve been placed upon.