Setting Your Investment Policy

Year to date the S&P 500 has set new record highs 53 times.  While the market has cooled a bit of late, it's still up more than 18% for the year.  At this point some experts are predicting continued strong gains, while others suggest the market is ripe for a fall.

Who's right, you ask?  I say "Who cares?"

Just The Facts, Ma'am

Equities, by their very nature, are volatile.  They are also, in the short to intermediate term (say, anything less than 10 years), very unpredictable.  Trying to time these markets is a recipe for failure.  Instead, if we want to earn the market's returns, we must be prepared to accept their volatility.

These are facts:

  • Over the long run, large company US stocks have returned north of 10% annually
  • Stocks are volatile.  While there has never been a 15 year period in which you would have lost money on stocks, there are plenty of shorter periods in which you would have lost money had you sold.
  • On average, we experience a bear market (defined as a drop of 20%) about once every 5 years.  The average bear market decline is more than 30%.

Every investor in stocks must accept the facts above as truth when making their investment policy.  As they say, "the truth shall set you free".  Once you understand the deal you are signing up for, you can then build a portfolio that captures the market's benefits, while simultaneously accepting the risks.  Your conviction will make all the difference in the world, even as those around you abandon stocks at the worst possible time.

Winston Churchill when speaking of democracy once said "Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time..."  The same may be said of investing in stocks to fund future retirement dreams.  We know that stocks have been a successful way to secure a comfortable retirement, and we know they come with price volatility along the way.  It is what it is.  Embrace the dichotomy or do not; it's your choice.  

Investment Policy Statements

Unfortunately many in the financial world believe they can (or at least claim to be able to) generate stock-like returns with much lower volatility.  This is one of the biggest charades in the investing world.  It simply cannot be done.  The return you get from investing in stocks is the reward you earn by tolerating the volatility and resisting the urge to sell when things seem bad.  This risk-reward relationship cannot be broken.  In fact, investors should openly embrace this tradeoff and build it into their plans.

Investment policies and plans should:

  1. Be tied to long-term goals.
  2. Reflect honest facts about risk and reward.
  3. Be in writing.
  4. Only change when the long-term goals change (which should be rare).

Where's Your Investment Policy Statement?

Investment policy statements should be required in any relationship between an advisor and a client.  The statement sets the "rules of the road" for the relationship and gives a sound basis for measuring one's progress toward retirement goals.

We've been helping clients prepare for, and thrive in retirement for over three decades. Our clients' continued financial success is exceeded only by their success at the game of life.

When we build retiree portfolios at Oxford, we seek a balance between Stability and Growth following the principles outlined in our proprietary Power of 5 Investing system. Our goal is to help clients achieve inflation-beating growth in their wealth, while managing through market downturns, ultimately helping clients leave a legacy to the people and places they love. Our system has been battle tested in 25+ years of market ups and downs and is ready for whatever the market can throw at it.

If you'd like to learn more about setting your investment policy, click on the link below.

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