In general, the purpose of Account Investment Guidelines statement is to outline a philosophy and strategy, which will guide the management of your investments toward the desired results. It is intended to be sufficiently specific to be meaningful, yet broad and flexible for functionality. It is meant to be stay fixed but will be reviewed with you at least annually.
The first and most important step in the investment process is documenting your risk and return profile. Objectives set your goals and constraints mark your boundaries. Then, the implementation of the strategy and tactics is how to reach your objectives.
OBJECTIVES
- Purpose
Plain English statement describing your account purpose. Chiefly describes your need or needs for use of the income and principal of your portfolio. Once stated it rarely changes unless your life circumstances changes i.e employment status, marital status health or lifestyle issues. - Return- Nature of your desired cash flow. It usually is some combination of capital growth and current income. Capital growth may be for your benefit or for future generations or other parties. Current income may have a fixed quality to it or may have a contingency requirement.
- Risk Tolerance
Your perception of fluctuation of principal and current income relative to an average person’s tolerance in similar life circumstances. While you may think you have an idea of your profile, it is best to make the final determination from a third-party perspective. Your financial risk profile may be at odds with your personal attitude of life risks. Your health should be taken into consideration.
CONSTRAINTS
- Time Horizon
Expected time frame for using funds generated as articulated in your purpose. It is not dependent on your age, i.e.grandparents building a legacy for their offspring, young adult building capital for starting a business or buying a residence or a teenager saving for college. - Liquidity Needs
Amount of minimum liquid cash you desire be transferred in one day to be held liquid at all times. The typical portfolio most often is invested in positions which may take up to a week to liquidate and have the cash available, unlike a bank account where you have immediate access to your funds. Market conditions may make liquidation undesirable. Usually a multiple of the your income needs are kept on hand. - Income Needs
Your monthly income needs to be distributed via a check or money transfer to your outside checking account. This cash flow can be your primary means of support or a supplement to your outside income sources. Also, it might be a cash flow streaming into your account when your outside income sources may be creatinga surplus. - Tax Bracket
Your federal, state and local marginal tax percentages. This constraint mainly applies to your taxable accounts from your current income perspective and taxable events triggered by realized capital gains or losses. Your IRAs and qualified plans are exempt from capital gain and ordinary income taxation while held in your portfolio. You are taxed only when funds are distributed from your portfolio. - Legal
Restriction by trust or statutory provisions. By default the rules and laws governing your personal assets apply in a an agency framework. In the case of a personal trust (revocable or irrevocable), your provisions embedded in your trust document govern the administration and investment of your portfolio assets. Retirement plans have their own legal administration and taxation framework which we need to be considered when constructing and executive your portfolio strategy. Various IRA and qualified plans have contribution and distribution limitations. Capital gains, and income are not taxed until distributed from portfolio where they are taxed at your ordinary income rates unless rolled into a qualified account. - Unique Circumstances
The default is usually none but these are restrictions or provisions you can request. It must be noted, your unique circumstance may compromise the efficiency of your portfolio when certain asset groups are deemed off limits.
IMPLEMENTATION
- Strategy
Once your objectives and constraints have been determined, an asset allocation strategy is matched to your needs based on capital market expectations over multiple business cycles. Provisions for generating your current income and maintaining your contingency reserves are put into place. - Asset Allocation
Three asset classes are used: equities, fixed income and cash equivalents. A target proportional mix of risky to less risky asset classes is established to match your profile to capital market expectations for at least a complete business cycle. Your targets remain constant in all market environments and avoids trying to ‘time the market’. As the result of market action or portfolio additions or withdrawals, the actual allocations of the portfolio will deviate from the target allocation. When the deviation reaches two percent or greater, trades are made to bring the actual percentages in line with your targets. This insures buying low and selling high without regard to market timing. - Foreign Exposure
A key area of portfolio management is controlling your risk. Another layer is geographical diversification. Global economies don’t march in lock step, add a layer of currency fluctuation and have unique return opportunities. Target proportion of foreign-based securities denominated in non-dollar currencies are used in construction of your portfolio and spelled out in your investment guidelines. - Vehicles
Investable securities have different configuration types with unique characteristics and add value depending on the size of the portfolio and your needs. Individual issues have one primary issuer, generally a public corporation. Exchange Traded Funds (EFTs) and mutual funds are a basket of corporations, bonds or commodities. These funds offer diversification and lower risk profiles. SCM generally uses individual issues in larger portfolios for their flexibility and ETFs in smaller portfolios. A third asset vehicle, money market funds are used in both types. - Tactics
Sometimes market conditions or unique circumstances don’t allow your long-term strategy to be implement immediately. Techniques such as ‘dollar cost averaging’ or ‘tax harvesting’ are used depending on the situation.
