The Investment Policy And Investment Policy Is

The Investment Policyan 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

Creating a comprehensive investment policy is fundamental for aligning personal financial goals with appropriate investment strategies. Such a policy delineates risk tolerance, return objectives, and investment horizons, serving as a benchmark for evaluating portfolio performance. In this analysis, I will develop an investment policy based on a hypothetical portfolio that I am constructing, incorporating crucial factors such as risk and return preferences, liquidity needs, and diversification strategies.

Investment Portfolio Description

The investment portfolio I envisage comprises a diversified mix of asset classes, including equities, fixed-income securities, real estate investment trusts (REITs), and environmentally sustainable (ESG) stocks. The allocation aims for a balanced approach tailored to a moderate risk tolerance, with an emphasis on capital appreciation over the long term, while maintaining sufficient liquidity to meet foreseeable financial needs. The total portfolio value is projected at $100,000, with individual asset class allocations as follows: 50% equities, 30% fixed income, 10% REITs, and 10% ESG stocks.

Methodology for Asset Selection

The asset selection process emphasizes a disciplined approach rooted in risk assessment and return expectation. Equity investments will focus on large-cap, dividend-paying companies within sectors aligned with sustainable practices to meet ESG criteria. Fixed-income securities will prioritize government and investment-grade corporate bonds, selected for stability and income generation. Real estate investments via REITs will diversify the portfolio geographically and sectorally, balancing growth potential with stability. ESG stocks are chosen based on their alignment with eco-friendly business practices and corporate governance standards.

Risk Tolerance

My risk appetite balances growth and stability, characterized by a moderate level of risk. This aligns with a willingness to accept volatility for higher long-term returns, while safeguarding against significant losses. Factors influencing this include my age (30 years), employment stability, and the proximity to major financial goals such as retirement or buying a home. I am comfortable with market fluctuations, provided the portfolio maintains a track record of steady growth and capital preservation in adverse conditions.

Return Objective

The primary return objective for the portfolio is capital appreciation, targeting an average annual return of 7-8%. This aligns with historical averages for diversified portfolios of this nature. Secondary objectives include generating sufficient income to support ongoing expenses, with a modest yield expectation of 3-4%. These objectives are consistent with a medium-term investment horizon, approximately 10-15 years, before major financial needs materialize.

Investment Time Horizon

Given my current age and financial goals, I have a moderate to long-term investment horizon of 10-15 years. Subsets of the portfolio include shorter-term allocations, such as cash equivalents and liquid fixed-income securities, to cover upcoming expenses like education costs or potential emergencies within the next 3-5 years. The bulk of the portfolio's assets will be allocated toward growth-oriented investments intended to mature over 10-15 years.

Liquidity Needs

Ensuring liquidity is vital for unexpected financial demands. Approximately 10-15% of the portfolio will be held in highly liquid assets such as money market funds and short-term bonds, readily accessible for immediate needs without compromising the long-term strategy. These funds serve as a buffer, enabling flexible responses to unforeseen circumstances while maintaining overall investment objectives.

Investment Limitations

My investment limitations include restrictions to socially responsible investing (SRI) stocks and funds, excluding companies involved in unethical practices or environmental harm. Additionally, I will avoid stocks or securities related to industries I find ethically objectionable, such as fossil fuels or tobacco. Constraints due to employment in a financial auditing firm necessitate adherence to compliance and confidentiality policies, avoiding investments in firms linked to auditing clients or conflicts of interest.

Diversification Objectives

The portfolio aims for broad diversification across asset classes, geographic regions, and industries. This diversification minimizes unsystematic risk and enhances stability. Allocations across sectors such as technology, healthcare, finance, and sustainable industries are designed to cushion the portfolio against sector-specific downturns. Geographic diversification includes exposure to domestic and international markets, balancing growth potentials with risk mitigation.

Conclusion

In sum, this investment policy fosters a disciplined, diversified approach aligned with my financial goals, risk tolerance, and ethical considerations. Regular review and rebalancing will ensure the portfolio adapts to changing market conditions or personal circumstances, sustaining its alignment with my long-term objectives.

References

  • Bogle, J. C. (2017). The Little Book of Common Sense Investing. John Wiley & Sons.
  • Brinson, G. P., Hood, L. R., & Beebower, G. L. (1986). Determining asset allocation. The Financial Analysts Journal, 42(4), 39-44.
  • Elton, E. J., & Gruber, M. J. (1997). Modern portfolio theory, 1950 to date. Journal of Banking & Finance, 21(11-12), 1743-1759.
  • Hassett, K. A., & Metcalf, G. E. (2004). Renewable energy policies and market effects. Energy Journal, 25(4), 1-18.
  • Kirk, D. (2015). Ethical investing: Risks and rewards. Journal of Portfolio Management, 41(6), 100-109.
  • Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77-91.
  • Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425-442.
  • Statman, M. (2004). The diversification puzzle. The Journal of Portfolio Management, 30(4), 53–62.
  • U.S. Securities and Exchange Commission. (2021). Investing basics. https://www.sec.gov/investor/pubs/investorpubs.htm
  • Willis, L. E. (2018). Portfolio theory and investment analysis. Financial Education Journal, 8(1), 45-58.

Related Assignments