Investment Policy Statement - Episode 94

Listen in for more on why you need an investment policy statement and how it can be a generational tool for good in your family! 

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JOSH KLOOZ, CFP®, MBA
WEALTH ADVISOR

Phone 281.719.0036
Text 281.699.8691
Fax 281.719.0156
jklooz@carsonwealth.com

1780 Hughes Landing | Suite 570
The Woodlands, TX 77380

Music by bensound.com

Transcript

Speaker 1: 0:47

Hello and welcome in again to the Wisdom and Wealth podcast. Thank you so much for joining us again today as we start the new year. I wanted to take the opportunity to again address, um, the topic of your investment policy statement. Now that can sound really formal, but I assure you it's not as tedious or as arduous as you may think. Simply put, an investment policy statement is really just you putting what you believe to paper. It's an explanation of what you believe, maybe even why you believe it, and some helpful reminders along the way, because, if you're like me, you need little guideposts along the way to jog your memory, uh, when you are tempted to doubt or tempted to uh, you know, look at shiny objects along along life's path. It route, it keeps you grounded and keeps you focused on what you're doing and why you're doing it. So this is not an all inclusive list, but I wanted to take this opportunity to explain why I think this is important and then also, uh, give you an idea of some of the things that are included on my own personal investment policy statement, um, and that you might consider yourself. So, first and foremost, it goes without saying, I think you need to understand who owns what you are investing. Now, this may sound like a gimmick, but I don't view myself as an owner, uh, of my resources. And, namely, I don't view myself as an owner because I can't tell you with me when I'm gone. I'm going to have to pass it on to someone else. So I'm merely a steward. And call me crazy. But that frees me up to make decisions. Um, free from certain pressures, I can look at what I'm doing from a longterm perspective. Take, take that if you will, but I think that you'll find that incredibly helpful. Second of all, um, who are those resources that you are investing in the market intended to help? How long do they need to last? What kind of rate of return do you need in order for them to be meaningful and effective, right, um, I've seen a lot of uh obituaries, um to this point in my life, and I can assure you that I'm yet to see any one of them that that reads he beat the SMP or she beat the SMP 500. I'll keep looking, but I really don't think I'm going to.

Speaker 1: 3:26

I'm going to, you know, find that out there, and I'm being a little tongue in cheek here, but my point that I hope you'll you'll take away from this is that your personal rate of return that you need in order for, uh, your plan, your financial plan, to be solvent is oftentimes much less than what you'll see, you know, out there in the marketplace. Most of the time, people need just a modest return after inflation in order to be successful. So I don't find for myself, personally, that it's really helpful to uh fall prey to. You know, take your pick of the seven deadly sins, namely envy or greed, and try to chase after what my neighbor may or may not be getting, and most of the time, that perception is just in my head. It's not really real, um, and so I find that it's helpful to view yourself, gauge yourself and weigh yourself according to your rate of return, according to what you need in order for your plan to be successful. The next piece I think that you need to take into consideration and just keep in mind is look at what your lifestyle costs today, and then you know, you can put it in a calculator, in the internet, or if you, you know, employ a financial planner, ask them okay, what is what I need today to live on? Going to be, you know, in inflated dollars 30 years from now? Keep that number handy. Have that number in your head.

Speaker 1: 5:08

The next piece that I think is helpful to find and have in mind is to have a chart of rates of return of the S&P 500, the aggregate bond market and inflation from let's call it 1920 to today. Have that chart ready to hand. Have that chart in your investment policy statement, because when you look at the inflated dollar that you're going to need 30 years from now, I want that picture to be in your head. I want you to think through okay, one of the only ways that I'm going to be able to meet my needs is if I'm properly allocated and properly invested, and when you're tempted to move, you'll hopefully come back to that and remember you know what, what has historically happened as a guidepost. Another thing that I think is important is to remember that the only way that you can harvest that risk premium, that spread between the convenience of certainty of, say, a bond or cash versus that equity return, is knowing one, the past history, but also knowing that that's just the price that you're going to have to pay. And sometimes, the way that you can help yourself to deal with that risk of the unknown, with that fear of the unknown, sometimes is to have your.

Speaker 1: 6:47

I call it my. I will always list, and by that I mean some people will write down. I will always have six months or a year's worth of cash in at hand, close at hand. I will always have two or three years in stable bond funds in order to ensure that you know I can stomach movements in the stock market. Another piece that I find for myself that's helpful is to make sure that a good portion, you know, for myself personally, a large portion of my investment portfolio is invested in dividend growth companies. Companies that A have a very healthy balance sheet, b are making a good net profit, and I can go quarterly and I can go look up any one of those companies and spot check where they're at. And the reason I can do that and the reason I would want to do that is because those profits turn into dividends and over time, those companies who have superior products and services that are evidenced by a healthy balance sheet grow that dividend over time and oh, by the way, they just so happen to outpace inflation.

Speaker 1: 8:02

So when I am tempted, you know, when I, when I start to, you know, see the waves of market volatility, you know, get a little bit, a little bit more choppy. I can look back and I can remember okay, here's step one, here's step two, here's step three, and here, here are the various things that are going to keep me stable and keep me grounded, and my clients grounded, through periods of volatility. At the end of the day, you know, it may be, it may be challenging for some, but I find that all these things are helpful. Now, why do I bring this up at the start of the year? Yes, it sounds a little bit New Year's resolution based, but we're also coming into an election year and sometimes people can be channeled into a, a place where they're like okay, well, I'm just going to, you know, I'm gonna hide out, I'm gonna wait, and they don't actually take action and they miss some of the best market returns that could have been afforded to them because they follow the crowd or they're nervous by the instability of.

Speaker 1: 9:12

You know that they see out in the media. Back to those charts I was talking about. Another one of the charts that you should have beneath the equity returns, is how much money is lost when people miss, you know, say, the five, the 10, the 15, the 20, or even the 30 best market days after periods of volatility Ie, they see volatility, they go to cash or they pull back from the market and then they're stuck. They don't know how to get back into the market and they wait for good sentiment or good feeling and they lose out. They pay the price of you know non-conformance and they lose that risk premium. Those are all helpful things that I find that keep me grounded and keep me rooted during periods where there's so many poles on your attention.

Speaker 1: 10:06

So, as you think through the year ahead, I hope that you'll consider putting to paper your investment policy statement. It doesn't have to be perfect, it doesn't have to be, you know, a thesis level document, because I want you to come back and I want you to review it next year and I want you to update it with things that you've learned. Imagine what that investment policy statement could look like 20 years from now when you pass it on to your kids or your grandkids, or maybe even a neighbor that is struggling with certain things and certain realities. Imagine if all of those things that you've learned about the market and have observed you're jotting down as the years go by and you're able to pass that on to the next generation. How cool would that be.

Speaker 1: 10:53

I think I'm gonna leave things here for now, but at the end of the day, my call to action today would just be hey, consider what it is that you already know, putting it to paper and reminding yourself. Dust it off weekly if you have to, but monthly or quarterly and review what your, what your, hope for, objective is and how that lines up with what you believe and what you know to be true. Thank you so much for joining me. As always, please like, rate and subscribe to the podcast, as this helps us serve additional listeners, and know that I'm wishing you and your family continued truth, beauty and goodness on the road ahead. Thank you so much and have a great day.