Most readers who send their portfolios give very short answers. A typical response is:
1. Growth and income
2. Medium
3. Don't know.
This is very worrying. All of these questions require deep thought and analysis, which should lead to well thought out, detailed answers.
So that's why I think that many self-directed investors need to take time out from watching the markets and grab a blank sheet of paper. And that's even if you've been investing for years.
If you go to a wealth manager and pay a significant fee they will formulate for you a detailed Investor Policy Statement based on a questionnaire and complicated risk modelling.
But we think that anyone with a bit of time and common sense can produce a DIY investment statement that will do just as good a job but without the eye-watering bill. The key is to take that bit of time to first think very hard about the three questions above. Then you need to fill out my suggested Investor Policy Statement form below. I have suggested some sample answers to help you start thinking about yours. But please come up with your own answers - and modify the form to include extra questions if you think this is necessary.
SAMPLE INVESTOR POLICY STATEMENT
| Name: | Time horizon: |
| Age: | Target retirement date XX |
| Financial goals: | Target Asset Allocation: |
| Financial independence and security. Control over financial future. | Cash X% |
| Invest capital to enhance income during retirement. | Bonds X% |
| Probability of success: XX | Property X% |
| Equities X% (UK X%, Overseas X%) | |
| Purpose of portfolio: | Diversification Policy: |
| Provide steady growth of capital until retirement. | No one fund or account should comprise of more than X% of a given asset class, except cash. |
| Invest capital for growth and income in retirement. | I will not have more than X holdings at any time. |
| Leave money for next generation. | |
| Risk & Return expectations: | Rebalancing and review: |
| I am a low/medium/high risk investor. | Rebalancing threshold of X% outside target asset allocation. |
| I do not want to lose more than X per cent in any year. | Portfolio reviewed every X months, selling what has gone up and buying what has gone down. |
| I expect to make real returns (above inflation and tax) of X per cent a year. | New money used to maintain target asset allocation |
| My investment philosophy: | Investment universe: |
| Markets work. | The portfolio will be based on core holdings in investment trusts. |
| Diversification is crucial. | If I cannot find a suitable trust I will use a low cost index tracking fund or exchange traded fund. |
| Risk and return are positively related. Portfolios should be tax-efficient. Minimising trading costs adds value. |
As you can see, the form forces you to put your investment strategy in writing and commit to a disciplined plan. Your answers can be very simple to start with. But you should review them at least every year as you become more experienced.
Some seasoned investors who read Investors Chronicle tell us that they are putting in place detailed investment strategies (read the comments on this article) that enable themselves to take the emotion out of investing. These would come under the 'Rebalancing and review' section of the form.
For example, IC reader Philip says: "I invest in well-covered high yield (but not excessive) stocks with a low PE and adequate market cap. I have built up to my maximum holding of 20 stocks. When I buy shares in a company I set a stop loss of 20 per cent, and as the share price rises I raise the stop loss and reduce the margin between the two. The stop loss formula is more complex than that, but that is essentially how I sell. Totally automatic, no emotion. Even in a falling market where a share price has fallen through my stop loss, I will reinvest the proceeds as soon as possible if I find a share that meets my buying criteria and I am happy with the company profile. When a holding has, say doubled in price, I might sell half my holding if I wish to make a new investment or increase my holding in another stock."
Another IC reader, Gillian, says: "I have a shortlist of 20 unit trusts and 20 investment trusts monitored regularly. I aim to buy them cheaply, hold and add as the price rises, and then exit/sell half when either the chart goes parabolic or the markets get into a panic. If the panic continues, I may stay out of the holding for quite a while. If it bounces back quickly, I still try to buy back in at 5-10 per cent below the price I sold at. By monitoring each fund on a regular basis, you get a 'feel' for when it is cheap or expensive."
