The Investment Policy: An Investment Policy Is

The Investment Policy an Investment Policy Is

This week's assignment is the Investment Policy. An investment policy is a starting point for setting and communicating an objective performance standard that helps guide investment strategy. If you were to visit a financial advisor, they would start with a session to help you define your investment policy, as this guides the investment strategy they would develop for you. The investment policy is a reference point that helps an investor compare portfolio performance with the guidelines specified in the policy statement. The investment policy is written in terms of both risk and return. It is important to evaluate one's risk tolerance before setting investment goals.

For example, when determining risk tolerance, factors such as an individual's family situation (marital status, number of children, future family plans, etc.) must be considered. Additional factors to consider are age, salary, the amount of cash currently held, health, and current insurance coverage. A person's return objective can be expressed in terms of an absolute or relative percentage or of a general goal, such as current income, capital appreciation, or capital preservation. In a two-page paper, develop an investment policy, providing a complete description of the portfolio being constructed (from the first assignment "P1"), and the methodology for asset selection, including but not limited to: · risk tolerance · return objective · investment time horizon (or breakdown on subsets of your investments and when they would be needed for major events) · liquidity needs · investment limitations (i.e., only socially responsible company stocks, and/or limitations due to employment by a broker or auditor, etc.) · diversification objectives Please see and for additional investment policy guidance.

Paper For Above instruction

Introduction

An investment policy serves as a foundational document that articulates an investor’s objectives, risk appetite, and strategy for portfolio management. It acts as a benchmark against which portfolio performance can be measured and provides guidance to ensure consistency in investment decisions aligned with long-term financial goals. Crafting a comprehensive investment policy requires careful consideration of personal circumstances, financial objectives, and market conditions, which collectively shape an investor’s approach to asset allocation and risk management.

Description of the Portfolio

The investment portfolio outlined in this policy focuses on a diversified allocation across multiple asset classes to balance risk and return effectively. The targeted portfolio aims to achieve a moderate to aggressive growth through investments primarily in equities, fixed income securities, and alternative investments such as real estate or commodities. The initial asset allocation is set at 60% equities, 30% bonds, and 10% alternative investments, with periodic rebalancing to maintain the desired risk profile. The portfolio also incorporates socially responsible investing (SRI) criteria, limiting investment to companies with strong environmental, social, and governance (ESG) practices.

Methodology for Asset Selection

Risk Tolerance: The risk tolerance is classified as moderate to high, based on age, income stability, and financial obligations. A balanced approach enables the portfolio to withstand market volatility while aiming for capital appreciation. Personal factors such as family situation, health, and employment status influence the willingness to accept short-term losses for long-term gains.

Return Objective: The primary goal is to surpass the average market return by 2-3%, targeting an annual return of approximately 8-10%. This goal aligns with the desire for capital appreciation with manageable risk levels, supporting future financial needs such as retirement or major investments.

Investment Time Horizon: The overall horizon is set at 15-20 years, with shorter milestones at 5-year intervals for major expenses. Investment in more liquid assets like money market funds or short-term bonds is prioritized for near-term needs, while long-term assets are geared toward growth.

Liquidity Needs: The portfolio maintains a liquidity reserve equivalent to six months of living expenses in cash or cash equivalents to cover unexpected expenses. Investments intended for major life events, such as purchasing a home or funding education, are designated with specific timeframes and associated liquidity strategies.

Investment Limitations: The policy restricts investments to socially responsible companies with high ESG scores, avoiding industries such as tobacco, firearms, and fossil fuels. Employment restrictions are also considered, avoiding conflicts of interest with current employers or auditors.

Diversification Objectives: The portfolio aims to achieve sector and geographic diversification across at least five different regions and multiple industries. This strategy minimizes unsystematic risk and enhances potential for consistent returns over market cycles.

Conclusion

Developing a comprehensive investment policy combining personal circumstances, risk appetite, and market considerations provides the framework for disciplined and goal-oriented investing. Regular review and adjustment of the policy are essential to adapt to changing life circumstances or market dynamics, ensuring continuous alignment with financial objectives.

References

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