Attributes of Sound Investment Policy

Attributes of Sound Investment Policy. Sound investment policy is realistic, has a long-term perspective, and is clearly defined.

Policy must be realistic

Every planner has had the painful experience of dealing with the unrealistic client – the person whose return expectations are unrealistic. Taming unrealistic expectations is one of the key purposes of policy formulation. If the planner and client cannot harmonize their expectations, they should not be doing business together. An investment policy must be based upon realistic expectations.

Policy should have long-term perspective

All research of financial markets indicates that the investment vehicles traditionally used by clients -stocks, bonds, money market funds, real estate (but not options) – have a positive bias in favor of the investor, i.e. the likelihood of an investment producing a positive return is in the client’s favor. Unlike the Las Vegas casino where the odds always favor the house, financial markets favor the investor, if the investor is patient. There are ups and downs in US financial markets, but over time the investor is playing a winning game. It is the investors best friend.

It is important for clients to understand the critical importance of time in developing their investment policies, as time is an important determinant of the kinds of investments that make sense for the client and the likelihood of success.

For example, the client with $30,000 who must increase it through investments to $50,000 in just three years has limited time for the positive bias of the stock market to work in his or her favor. Also, the limited time available to the investor makes short-term fluctuations a major concern and may dictate the use of investment vehicles that fluctuate less if the investor is unwilling to accept the additional risk for the potential additional return. If this same investor had more years in which to reach the $50,000 goal, short-term fluctuations would matter much less, and investments could be chosen with grater attention to their long-term return.

Policy must be clearly defined

Attributes of sounds investment policy makes certain that an investment policy must be clearly defined, ideally to the point that a competent stranger would be able to manage the clients assets in away that is consistent with the clients interests and intent. There should be no spoken or unspoken understandings between the client and planner that do not appear in the written policy. Clarity reduces the chance of error and disputes.