Building a sound investment strategy

Last month, I wrote in detail about why financial planning needs to lead the investment process. Once the financial plan is designed, it’s time to move on to one of the most important components of any long-term plan: development and ongoing maintenance of an investment policy statement (IPS), or investment strategy. It is the link between your financial plan and the ongoing work necessary to manage a prudent investment portfolio.

So, what’s a good approach to building an investment strategy? Like financial planning, I think it’s a time-intensive process and not a static result. I think it’s best managed when you work together with your advisor and don’t just “hand it off.”

It is also not something you do in haste. Hasty decisions and reactions are not the foundations of a good plan. Rather, you should think about the investment policy as a business plan. Most successful businesses have written business plans; successful investors should have a written investment strategy.

The investment strategy should include:

  1. Goals. Your long-term goals and objectives should be laid out clearly and concisely. This should also include cash inflows and outflows, along with an assessment of the reasonableness of your goals.
  2. Constraints. Everyone has constraints in building a plan, whether it’s taxes, limited options, or simply because you have unique ideas about the world that don’t necessarily match the advisors’ house philosophies and so you want that noted in how you want to invest. For example, many investors wish to pursue socially responsible investing even though the evidence doesn’t always support this over other approaches. If that’s the case, it should be honored in your plan since it’s your money and your plan, but also noted as a constraint.
  3. Reasonable assumptions. The guidelines for investing should be both appropriate to your situation and also to the investment markets as a whole. For example, if your situation is one needing bond returns of 5%, but the market realities today are only 2% to 3%, the guidelines are not useful. Make sure you start off with realistic assumptions.
  4. A long-term time horizon. Build it so it’s sustainable for the many short-term periods of extreme volatility that investors will face over their lifetime. Long-term is not three years. Long-term is, at the bare minimum, five years; ideally, long-term investment strategies should look ahead 10-plus years. If you have a plan for under five years, that’s likely not an investment strategy as much as it is a savings strategy. Those are different goals.
  5. Commitment. A great plan is useless if you don’t commit to it.
  6. Historical reference. Use history as a guide, so you’ll understand what history can teach us, as well as the likelihood that the past may likely NOT repeat itself.
  7. Risk tolerance. Define the level of risk you are willing to take, but note risk tolerance is not static; it changes over time and for various known and unknown reasons. As your risk tolerance changes you need to change your policy accordingly, so make sure you tell your advisor when you’re ready to assume more (or less) risk.
  8. Return targets. Determine the rate of return, which is often highly correlated to your willingness to take on risk. This is subjective depending on whether you use historical or forward-looking data. It also needs to include costs and fees. Again, make sure they’re both reasonable and match practical realities of your plan. If you are targeting 10% to 12% returns in your portfolio, and you have half your portfolio in bonds, you are living in fantasy world. You are likely not making reasonable assumptions since, for example, U.S. large cap stocks over the very long term have not achieved more than 10%, and that’s before fees. Today, investment-grade bonds pay about 1% to 3%; blend that together and you are nowhere near 10%. Probably more like 5%. That’s a dial mover if you don’t reflect on how that impacts your plan.
  9. Investment holdings. It’s now widely accepted that portfolios should be diversified among asset classes. Select the asset classes that make the most sense for you from among the universe of stocks, bonds, etc. Be comfortable and knowledgeable about your holdings since, again, it’s your money.
  10. An ongoing process. Establish the means for making periodic adjustments to your portfolio as needed, or as life inspires. I say this often — investing is a social science, not a hard science; it is also not a law of nature. It evolves with you and you need to be active in the process by staying knowledgeable about not only your holdings, but more importantly your goals and objectives.

Investing is not easy without a plan. A plan takes time. I am unapologetically biased toward investors working with a fee-only fiduciary advisor who builds a plan with you in concert with your goals. Hopefully this and my previous article have helped you get your foundation in order so you can move forward with greater clarity.

MICHAEL DUBIS is a fee-only CERTIFIED FINANCIAL PLANNER™ and president of Michael A. Dubis Financial Planning, LLC. He also previously served as part-time lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at

Disclaimers: This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this website or that of the author’s.

Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio's performance are based on historical data and one should not assume that this performance will continue in the future.


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