Creating an investment plan and Investment Policy Statement (IPS)

Setting goals gives you long-term vision and short-term motivation, and making a plan helps you keep track of your progress towards those goals and makes you aware of whether you need to make any adjustments to reach those goals.

To create an investment plan, you need to

Sample investment plan

Goal

60k/yr in retirement in 2040.

Using the 4% rule, that requires $1,500,000 in today’s dollars.

Current savings/investments are 150k in super and 200k outside super, so using the Excel FV function, we have a couple of options.

AA of 70/30 (70% stocks and 30% bonds) and save $1,850/month (includes employer super contributions).
AA of 100% stocks and save $1,325/month.
AA of 70/30, save $1,325/month and stretch it out to 22.5 years.

Remember, there are only three variables you can change:

Expected return (decided by your AA)
Amount saved per year
Years until retirement

You can choose any 2 of the 3 variables and it will dictate what the last will need to be.

You need to be able to tolerate your asset allocation (AA). If you’re overly aggressive and panic-sell when the market has spent two years steadily dropping to half as you freak out thinking it will never recover, the whole plan goes out the window. At best will mean a lot more years to save, and at worst, it may permanently cripple your ability to ever reach your goal. It is often better to spend a bit longer achieving your goal in a tolerable way than risking your life savings to try and save a year or two of working.

Don’t forget –
These amounts include your employer-paid super contribution, so you’ll have quite a lot less to save out of your own pocket; and
These figures from the linked spreadsheet include a 15% safety margin of returns, so if equities perform as well as they have over the past 90 years, you will be ahead of your plans.

Savings required

$1,850/month

Asset allocation

Stocks 70%
35%	Global stocks
17.5%	Australian stocks
17.5%	Global stocks AUD-hedged
Bonds 30%
30%	Australian bonds

Plan B

Work longer

Sample Investment Policy Statement (IPS)

Investment objectives

My objective is to gain financial independence in my 40’s. I will not withdraw from my portfolio until I have achieved this goal.

Risk tolerance

My risk tolerance is high. I’m aiming for early financial independence, and a high level of equity exposure will be necessary to sustain this. I’m also relatively young and do not have a fixed date in mind for retirement, so I have time to recover from market volatility.

Fund selection criteria

● All funds must use an index investing strategy.
● Overall portfolio fees must be no higher than 0.3%.
● To keep things manageable, the total number of funds must be no greater than five.

Asset allocation

Stocks 80%
40%	VGS	Vanguard International Shares Index Fund
20%	VAS	Vanguard Australian Shares Index Fund
20%	VGAD	Vanguard International Shares Index Fund AUD-Hedged
Bonds 20%
20%	VAF	Vanguard Australian Fixed Interest Index Fund

The above asset allocation within stocks is intended to mitigate the following risks:
● Country-specific risk (75% is ex-Australia).
● Home currency upside risk (50% is in AUD).
● Home currency downside risk (50% is in international currencies).

The 25% domestic equity allocation is above what market-cap weighting would suggest but will help reduce currency risk and benefits from franking credits. Even if the Australian market underperforms, 25% should mitigate the impact on the overall portfolio.

When to invest

Invest as soon as money is available, no matter what the market is doing.

This rule is to avoid the behavioural mistake of subconsciously timing the market because market timing doesn’t work.
If the market seems overvalued, it could easily continue up for another five or more years, and we would have missed out on buying before it went higher.
If the market seems low due to some state of emergency, by the time it’s “safe”, the market will have priced in the lack of risk and recovered before the chance to buy back in, ensuring a permanent loss through opportunity cost.

Buy as soon as money is available regardless of current market conditions.

The only time to not buy as soon as possible is if we have under $3,000, in which case buy as soon as $3,000 is available. This is to minimise brokerage.

Review process

I will review my portfolio once per year on December 1st to make sure it is still in line with my goals.

As I approach retirement, I will increase my fixed-interest allocation to 40% and gradually glide back up to 80% equities in the 10 years following retirement. This is known as a “bond tent” or “equity glidepath” strategy and should help mitigate sequence-of-returns risk.

Rebalancing

I will rebalance my portfolio using these techniques (in order of preference):

Add new contributions to the most underweight asset class.
Direct fund distributions into the most underweight asset class.
Adjust asset allocation in my tax-advantaged account to rebalance the overall portfolio.
Sell overperformers and buy underperformers. This will be done at most once per year (on December 1st) and only if an asset class is further than 5% from its target allocation.

This rebalancing approach will minimise tax liabilities.

Savings goal

I will save and invest at least 50% of my after-tax, after-super income. I will strive to improve this further over time.

Changes to this document

If I wish to change this document, I must wait at least three months before implementing it. During this time, I must ask for feedback about the proposed changes on the Bogleheads forum. This should prevent me from making hasty/panicked decisions that may have long-term negative consequences.