Investment Strategy

Overview

Develop and execute personal investment strategies including portfolio allocation, risk tolerance assessment, and investment selection

Steps

Step 1: Assess current financial situation

Establish a complete picture of your finances:

1. Calculate total income (salary, side income, investment income)
2. List all assets (bank accounts, retirement accounts, property, etc.)
3. List all debts (mortgage, student loans, credit cards, etc.)
4. Calculate net worth (assets minus debts)
5. Review monthly cash flow (income minus expenses)
6. Confirm emergency fund status (3-6 months expenses)
7. Inventory existing investments and their current allocation

Step 2: Define investment goals

Articulate specific investment objectives:

1. List all financial goals (retirement, house, education, etc.)
2. For each goal, specify:
   • Target amount needed
   • Time horizon (when money is needed)
   • Priority (essential, important, nice-to-have)
   • Flexibility (can timeline or amount adjust?)
3. Calculate required return to meet each goal
4. Rank goals by priority and timeline
5. Identify any conflicting goals requiring trade-offs

Step 3: Assess risk tolerance and capacity

Determine appropriate risk level:

1. Complete risk tolerance questionnaire
   • Answer questions about reaction to losses
   • Consider past investing experience
   • Be honest about emotional responses
2. Evaluate risk capacity factors
   • Time horizon for each goal
   • Income stability
   • Emergency fund adequacy
   • Dependents and obligations
   • Other wealth sources
3. Reconcile tolerance with capacity
   • If tolerance > capacity: use capacity
   • If capacity > tolerance: consider if tolerance can grow
4. Determine overall risk profile (conservative to aggressive)

Step 4: Determine target asset allocation

Set allocation percentages for each asset class:

1. Start with risk profile suggested allocation
2. Adjust for specific circumstances:
   • Multiple goals may need different allocations
   • Tax considerations (which accounts hold what)
   • Existing holdings that are difficult to change
3. Define sub-asset class allocations within each class
   • US vs international stocks
   • Government vs corporate bonds
   • Large vs small cap
4. Set allocation ranges (e.g., 55-65% stocks) for flexibility
5. Document rationale for allocation decisions

Step 5: Select specific investments

Choose investments to implement allocation:

1. For each asset class, evaluate vehicle options:
   • Index funds vs ETFs vs active funds vs individual securities
   • Compare expense ratios (lower is better)
   • Consider tax efficiency
   • Evaluate tracking error and liquidity
2. Select specific funds or securities
   • Prioritize low-cost broad index funds for core holdings
   • Consider target-date funds for simplicity
   • Evaluate any active funds carefully (most underperform)
3. Determine account location (tax optimization)
   • Tax-inefficient assets in tax-advantaged accounts
   • Tax-efficient assets in taxable accounts
4. Create implementation shopping list

Step 6: Create Investment Policy Statement

Document strategy in written IPS:

1. State investment objectives and goals
2. Document risk profile and rationale
3. Specify target allocation with ranges
4. List selected investments
5. Define rebalancing rules (triggers and frequency)
6. Specify what would cause strategy review
7. Include commitment to stay disciplined
8. Sign and date the document

Step 7: Implement portfolio

Execute the investment plan:

1. Open any needed accounts (brokerage, IRA, etc.)
2. Decide on implementation approach:
   • Lump sum (invest all at once) - historically better
   • Dollar cost averaging (spread over time) - reduces regret risk
3. Place orders for selected investments
4. Verify allocations match targets
5. Set up automatic contributions if applicable
6. Document purchase prices and dates

Step 8: Establish monitoring and rebalancing plan

Set up ongoing portfolio management:

1. Define rebalancing triggers:
   • Calendar-based (quarterly, annually)
   • Threshold-based (when allocation drifts X% from target)
   • Combination approach
2. Set review calendar:
   • Monthly: quick check
   • Quarterly: detailed review
   • Annually: full strategy review
3. Define what triggers strategy reconsideration:
   • Major life changes
   • Goals achieved or changed
   • Market regime changes
4. Create rebalancing procedure:
   • Review current allocation
   • Compare to targets
   • Calculate trades needed
   • Consider tax implications
   • Execute rebalancing trades

When to Use

• Starting to invest with meaningful capital
• Major life changes (new job, inheritance, retirement approaching)
• Significant portfolio value accumulated without clear strategy
• Current investment approach feels random or reactive
• Need to consolidate multiple accounts into coherent strategy
• Approaching retirement and need to shift allocation
• Risk tolerance has changed due to life circumstances
• Want to formalize informal investing habits

Verification

• Risk profile reflects both tolerance and capacity
• Allocation aligns with goals and time horizon
• Investment selections are low-cost and appropriate
• IPS is documented and signed
• Rebalancing rules are clear and actionable
• Tax implications have been considered

Input: $ARGUMENTS

Apply this procedure to the input provided.