Personal Finance

Distilling your investment approach into a few sentences can further some important goals.
By Christine Benz | 12/01/18

Harold Pollack, a professor of public policy at the University of Chicago, generated a good deal of buzz a few years ago by scratching out "all the financial advice you'll ever need" on a 4x6 index card.

About the Author
Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success.

Morningstar readers may disagree about some of Pollack's advice--specifically, his exhortation to avoid picking individual stocks and to skip actively managed funds. But it's hard to disagree with Pollack's overarching goal of helping investors cut through the clutter and focus on what really matters. Investing well doesn't have to be complicated, despite the investment industry's efforts to make it seem otherwise. Instead of getting bogged down in byzantine and often expensive products and strategies, investors will have a better shot at reaching their financial goals if they tune out the noise and focus on basics like saving enough and taking advantage of tax-sheltered wrappers.

In a similar vein, you should also be able to distill your own investment approaches into just a few easy-to-understand sentences--or at least get them onto a single note card. Such a process can serve several important goals. First, it can help ensure that your investment strategy isn't too complicated and doesn't require too much maintenance on an ongoing basis. While you may be willing and able to devote a big share of your time to your portfolio right now, that may not be the case at other life stages.

Employing a streamlined, straightforward investment strategy can also be helpful from the standpoint of succession planning for your portfolio. If you can't explain your investment approach to your spouse, trusted adult child, or other loved one in plain language and in just a few sentences, it would probably be difficult for them to manage without a lot of hand-holding from you. Portfolio succession planning is important at every life stage, but especially for older adults who are actively drawing at least a portion of their living expenses from their portfolios. It's important that your spouse knows which accounts you're relying on to fund your ongoing living expenses.

Having a skinnied-down, clearly articulated investment strategy can also serve as a litmus test for the specific investments you hold or might consider buying in the future: If an investment doesn't sync up with the simply stated strategy, then it probably isn't a good fit for your portfolio.

The challenge

Even if you don't have any note cards handy, you can still take up the challenge of distilling your investment strategy into just four or five sentences or bullet points. Avoid investment-related jargon, which can conceal overly complicated strategies and investments. Be sure to include the following:

  • Your overarching goal for your investment portfolio
  • The basic parameters you'll use for investment selection and the types of investments you'll favour
  • The outlines of how you'll maintain your portfolio on an ongoing basis

I tried my hand at this exercise with my own investment strategy; here it is:

Goal: To build a low-maintenance, low-cost, high-growth portfolio to fund retirement and shorter-term goals.

  • Invest in low-cost mutual funds, both index and active, via registered and taxable accounts
  • Favour equity funds but gradually enlarge bond position as retirement approaches
  • Hold cash and short-term bond funds for near-term expenditures
  • Check up once a year; rebalance if asset allocation is +/- 10 percentage points of target allocation]
  •  

    A retirement-investment-strategy note card

    I'm still accumulating assets for retirement; an investment-strategy note card for someone already retired might look a little different. Here's an example.

    Goal: To withdraw 4% of total initial portfolio balance, adjusted annually for inflation, from a balanced portfolio

  • Maintain 50% stock/50% bond portfolios in registered and taxable brokerage accounts
  • Rebalance back to target allocations on an annual basis
  • Use income distributions from RRIFF to fund living expenses and meet required minimum withdrawals
  • If additional living expenses are needed, withdraw from money market funds in taxable brokerage account
  •  

    A jumping-off point

    Your "investment strategy on a note card" provides a solid foundation for an investment policy statement (IPS), another essential document for portfolio planning. Thus, if you don't already have an IPS, your investment-strategy note card can help guide the way to getting one done.

    For example, my investment-strategy note card said that my portfolio will include a mix of low-cost actively managed and index funds; my IPS should include the specific parameters I'll use for selecting these investments and what triggers I'll use when deciding whether to sell. And while my investment-strategy note card references my asset allocation only in very general terms, my IPS should flesh out the specifics, noting both how I'll set the targets for my stock/bond/cash mix, as well as how those targets will change over time.

    Your investment-strategy note card can also provide your spouse or other trusted loved one with an overview of your investment program. Even if your significant other professes to have no interest in such matters, you can use the note card to bring him or her up to speed on your plan's bare-bones basics. You can also place the note card at the top of other important financial documents--such as your IPS, master directory and estate-planning documents--to help light the way in case you're unable to manage your own financial affairs for a period of time. That way, your loved ones will have an overview of your plan without having to wade through documents or even read your IPS, which may be too detailed for their needs.

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