Investment policy statement: Why you really need it

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Published: April 4, 2017 4:44:24 AM

Once you have the written document in place, you will have the reference point and the benchmark to look up to and then make your decision.

investing journey, Investment policy, personal finance, Investment Policy Statement, investorOnce you have the written document in place, you will have the reference point and the benchmark to look up to and then
make your decision. (Source: Reuters)

It is a fact of life that most of us are slave to emotions. It is a difficult habit to change. And the same holds true in the investing journey, too. Why is it that we hold on to the losers and willingly part with the winners? Is there a way, method and process, wherein we can reverse the situation—part with the losers and hold on to the winners?

Trait of emotions
In the course of meeting with investors who invest across asset classes,I came across an investor who had a particular mutual fund scheme in his portfolio, which he was holding since 1994. This particular scheme, inspite of its below par performance, was always the pride. Any talk for the redemption of this below par scheme was met with stoned silence. Finally, the fund house which had the below par scheme was acquired in 2014 by another fund house. And then this investment was sold after 20 years.

The amount invested was only `10,000 (held since 1994). The value in 2014 was around `80,000, yielding CAGR returns of 11%. The scheme returned only eight times in 20 years. During the same period, similar schemes had delivered 30-35 times growth. Why did this happen? This particular investment was the first ever investment executed by the investor and it was a symbolic memoir. It reminded the investor about the struggle, progress, success of his investment journey. Only after the scheme got acquired and the name changed, was the investor able to get rid of this emotional baggage.

Discipline in investing
Is there a way where the emotions attached can be clinically detached. There is a method, but you need to have the discipline and the determination to implement it. This is where the Investment Policy Statement (IPS) comes into play. IPS records and states end–to–end process to be followed in the investing journey. It brings discipline to the process and enables to execute the process, as per what is stated in the statement. A very structured, disciplined, easy to use and execute approach in the volatile emotion charged investing journey.

The investing time horizon, liquidity needs, risk appetite, expected return, action to be carried at regular intervals, action to be executed at volatile times, asset allocation, when to execute the transactions to redeem, book profits/ losses, revisit the asset allocation, etc. are all noted in the IPS. So, once you have the written document in place, then you will have the reference point and the benchmark to look up to and make decision. What is noted and recorded, can be measured and be used for decision making, which is paramount in the investing journey.

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Accepting emotions as a key element in the decision making process and then putting in place a process to mitigate the emotions is the key. The biases, which are part of the emotions , is also an important element in this journey. Again knowing the biases and putting in place process to mitigate the biases, hold the key .And the key is in your hands—as the investor. Accepting the emotions and biases and having a plan and process through the IPS, can be the beginning in ensuring your conquest of the emotions.

The writer is managing partner of BellWether Advisors LLP.

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