Chapter 12. Create an Investment Policy Statement

One of my favorite programs on National Public Radio is This I Believe, a series of spoken essays in which individuals articulate the beliefs that have helped shape their lives. The essays, based on a 1950s' radio program hosted by Edward R. Murrow, include thoughts about birth and death, baseball and driving. Big names like Muhammad Ali and John Updike have contributed essays to This I Believe, as have schoolteachers and attorneys. The series consistently demonstrates the value of having an overarching set of beliefs that can help you appreciate what's important to you and navigate tumultuous times.

Think of your investment policy statement, the subject of this chapter, as your own, investment-related version of This I Believe. In it, you'll articulate the key reasons why you're investing, what you're hoping to gain from your investments, whether you're on track to meet your goals, and how often you'll make changes. Once you've created one, you can use your investment policy statement as your compass, a check to keep your investment portfolio on course to meet its goals even when the market and your emotions are telling you to run for the hills. Referring to your investment policy statement before you make any investment decisions can help ensure that you're investing with your head, not your gut.

Corporations and big institutional investors like pension plans create elaborate, 20-page investment policy statements. However, you needn't ...

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