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Your Investing Master Plan


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As an advisor client, it's important for you to spell out investment goals and strategies by crafting a master plan. A document call an investment policy statement ( IPS ) lays all this out. You should know about the mechanics of an IPS.

Almost every major life transition engenders new and often confusing budgetary and cash flow demands. Shifting circumstances deliver many challenges: a career disruption, building a new business, marriage, paying for children's educations, retirement needs, health-care crises or caregiving for elderly parents or other loved ones with special needs. Ask yourself: "What do I need my money to do?" Then, an investment policy emerges.

A written investment policy statement defines the philosophy that guides the management of your money, including a risk/reward profile. The IPS establishes guidelines and constraints to follow in the management of your financial assets. Normally, the IPS does not list specific securities in a portfolio. However, you may spell out restrictions, such as what securities to avoid if you with to prevent lopsided allocations, or if they violate social or religious convictions.

The first step is to list current investments. Specify who owns the asset (your spouse, custodian for a minor, trust, jointly owned, tenants-in-common, business entity, etc.). Ownership information is important in devising income and estate tax planning strategies.

Identify potential inflows and outflows from your portfolio, including required minimum distributions ( RMD ) from retirement accounts - other than a Roth IRA - for those over age 70½, or for inherited individual retirement accounts. What will you withdraw monthly, quarterly or yearly?

Arrive at longevity assumptions to estimate how long the money might last. What do you expect the portfolio to return each year, over and above an assumed rate of inflation and estimated tax rate? Will you withdraw or reinvest dividends?

How much of a loss can you tolerate over a quarter, year or five years? Will you apply loss minimization techniques - for instance, by imposing stop-loss orders , to sell holdings whose price fall to a certain trigger point? Does your strategy allow option writing: puts (a contract to sell a holding at a specific price) or calls (the opposite, to buy it), or using margin (borrowing to buy securities, with your existing assets as collateral) to generate income or hedge volatility?

What is the current asset allocation? What is the revised target allocation, if any? What is the percentage mix of cash, fixed income (certificates of deposit, bonds), large-cap stocks, mid-caps, small-caps and micro-caps, U.S. equities, foreign shares? Will your portfolio include alternative investments , like derivatives or commodities?

Liquidity ­- how easily you can sell an asset to garner fresh cash -may be important, especially where there is a high degree of uncertainty. What is the ratio of liquid to non-liquid or semi-liquid investments?

What is your need for income, now or in the near future? Are issues of aging a consideration? Women often worry, once their husband dies, about losing one Social Security check or a decrease in pension proceeds, Veteran Administration or other income streams. Two methods of mitigating that harm: life insurance covering the first to die and long-term care coverage.

If the surviving spouse is relatively healthy, with a potentially longer lifespan in an inflationary economy, the investment policy is even more acute. How long can you expect the money to last beyond your passing? 

State the investment objective: income, growth or a mixture of both. If a goal is stated, how long will you fund efforts to attain it? How much will you contribute each period?

If you withdraw money, from which accounts and at what rate do you do so? Will you employ a bucket strategy , where you divide your assets into three pieces, with one in conservative investments, intended for immediate income, and the other two more long term. What governs withdrawals from a particular bucket of money?  Is there a tax strategy?

Articulate your investment philosophy. What is important to you? What philosophy governs risk, diversification, trading, costs, commissions and taxes?

Are there selection criteria for mutual funds, bonds, stocks, CDs, alternative investments? Are there prohibited or restricted investments? Should you avoid certain categories of investments or industries?

How will you monitor the portfolio and how often? How often will you rebalance the portfolio? What benchmarks will you apply? Is your portfolio meeting expected returns? Is volatility within accepted ranges?

You or the holder of your power of attorney (or a trustee if assets are held in a living trust , set up while you are alive for easy transfer of assets to another) should sign off on the IPS. Personally keep a copy of the executed IPS, should anyone, such as a family member, question the policy it follows. Review it periodically to adjust for changes in your own situation or in the world around you - in the economy, the market, the tax code, etc.).

You would not plan a driving trip around the western United States without a detailed road map. An investment policy statement is just that - a road map for your money. When detours are confronted, you are ready.

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Lewis Walker, CFP, is president of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (RIA) in Norcross, Ga. Securities and certain advisory services offered through the Strategic Financial Alliance Inc. (SFA). Lewis Walker is a registered representative of SFA, which is otherwise unaffiliated with the Walker Capital Companies. 770-441-2603 lewisw@theinvestmentcoach.com .

AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks , Commodities
Referenced Symbols: RMD



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