Would you leave on a year-long journey without first spending some time mapping out your route, exploring your options, and identifying any challenges that might arise along the way?

If you were travelling with your family, the planning process would be even more involved, as you would take into consideration the needs and interests of each individual, their age and temperament.

Similarly, the investing journey takes considerable foresight and planning, especially if you making provisions for the future needs of family members. Successful investing has a long time horizon, for reasons we have often discussed in this column. Setting out without a carefully mapped out long-term plan will likely result in decision-making that is influenced by short-term market swings. This, in turn, exposes your investment portfolio to greater volatility, with its associated emotional and financial costs. Most importantly, you are much less likely to reach your interim life and retirement financial goals.

An effective tool for planning your investment journey is the Investment Policy Statement (IPS). The IPS documents the range of decisions you need to make and communicate to your financial advisor when you invest your money. Simply put, a well-crafted policy will include:

  1. An understanding of where you are financially
  2. An understanding of where you are headed—your goal (and interim financial goals along the way)
  3. A plan to bridge the gap between where you are and where you want to be.

As with any plan, the more thought you put into working out the details, the more likely you are to anticipate obstacles to a successful outcome and find solutions. Here the adage, ‘Expect the best but plan for the worst,’ applies: if ‘x’ happens, I will do ‘y’. A good plan also makes provisions for the unforeseen and unknowable, by having enough liquidity to ride out difficult life or market situations.

In drawing up an IPS with your financial advisor, here are some details to consider:

  • Do you have different portfolios (pools of capital) for different financial purposes/goals? For example, have you provided for:
    • Retirement cash flow
    • Future property purchases
    • Travel plans
    • Estate/legacy plans
  • Taxes:  your choice of investments may be affected if a portfolio is taxable
  • Expected returns on your investments
  • Expected volatility/risk associated with these returns
  • How will you measure or benchmark a portfolio’s performance?

Once your plan is in place, you should set up a schedule to meet with your financial advisor on a regular basis (annually may be often enough in normal circumstances) to make sure you are still on track to meet your goals. Your IPS needs to be updated to reflect any changes in your personal life that might impact the effectiveness of your original plan (i.e., a marriage or divorce, birth or death, increase or disruption of income).

An often overlooked benefit of the Investment Policy Statement is its role in helping you maintain the self-discipline needed to stick to your long-term plan. ‘Know thyself’ is an important principle in investing, and working that self-knowledge into your investment plan is crucial to a successful outcome. For instance, a common self-defeating investor behaviour is to ‘buy high and sell low,’ which no rational investor plans to do. The problem is that humans are emotional creatures and emotions strongly affect our decision-making process. If you know that you become very anxious when the market resembles a rollercoaster, this planning process is a good time to make a calm, rational decision about what you will do when you see your portfolio plummeting and you are prone to make a panicked decision to sell at precisely the wrong time.  Or when the market is skyrocketing and you might make an exuberant decision to buy at the wrong time. The simple process of thinking through your ideal behaviour in advance is in itself calming—and a rehearsal for a real life situation. If you are on the verge of giving in to your emotions, referring to the IPS will remind you of the decision your rational self made and help you tough out short-term volatility by focusing on the long-term journey.

Another aspect of ‘know thyself’ that comes into play when you are drawing up your plan is honestly assessing how much risk-related anxiety you can bear without losing sleep over your short-term portfolio performance. When markets are calm or on an upward trend, it is easy to say ‘yes’ to a plan with aggressive investment goals. It is better to have a plan that you can stick with and lets you sleep nights—even if the expected returns are slightly sub-optimal in terms of meeting your long-term goals— than to have an ‘ideal’ plan that you are almost certain to abandon during times of market volatility.


This article was first published in the September 2013 issue of Sask Business, authored by Daryn Form.

Daryn Form is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.  The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above.  The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.  Rates are not guaranteed and are subject to change at any time without notice.