Purpose of Portfolio
The purpose of the portfolio is to provide steady growth of capital until retirement and an inflation-adjusted, after-tax income of $50,000 every year in retirement.

Return Expectations
We expect pre-tax, inflation-adjusted returns of 1% from cash, 2% from bonds and 4% from stocks and REITs. We expect a dividend yield of 2% from stocks that will at least keep up with inflation.

Time Horizon
Our target retirement date is 2030. We expect to have an estimated nest egg of $2,000,000 in today’s dollars that will supply an annual pre-tax income of $60,000 at a 3% withdrawal rate.

Asset Allocation
Cash – 5%, Bonds – 15%, Real Return Bonds – 5%, REITs – 5%, Canadian Equities – 20%, US Equities – 22.5%, EAFE Equities – 22.5%, Emerging Markets – 5%.

Rebalancing
The investment portfolio will be rebalanced to the target asset allocation when new money is added. The portfolio’s asset allocation will be checked once every year on June 1st and if necessary, we will rebalance back to the target by selling whatever has gone up and buying whatever has gone down.

Investment Vehicles
Cash will be held in high-interest savings accounts, cashable GICs, money-market funds or T-bills. Bond positions may include: Government of Canada bonds, GICs or XSB. REITs and Canadian Equities may include stocks, XIC, index mutual funds or actively-managed mutual funds. US equities, EAFE equities and Emerging markets are captured through ETFs or index mutual funds. No individual stock position is allowed to exceed 10% of the overall portfolio. The portfolio will avoid: investing in options, futures or any other derivatives, shorting, leveraging, individual positions in foreign stocks, speculative stocks such as junior exploration companies, biotech discovery companies etc.

Benchmarks and Review
As the portfolio is mostly indexed, the only review and evaluation required is for the Canadian Equities and REITs portion of the portfolio. The benchmark for Canadian Equities is the TSX Composite Index and XRE for REITs.

Note: This simplified IPS is for illustration purposes only. Customize based on your goals and needs. The actual dollar amounts and specific dates are for illustration only. Your comments are welcome.

Download in Microsoft Word format.

This article has 32 comments

  1. I just finished reading “Your money and your brain” (Jason Zweig) and was going to put an Investment policy statement for myself, too.

    Thanks for the example, this is a good starting point.

  2. Canadian Capitalist

    This IPS is based on the one in Your Money and Your Brain. I modified it quite a bit; hope you find it useful for writing your own.

  3. You seem to be outlining an investment strategy with monetary targets, without actually stating how much money you will put into it over what period of time. Am I missing something here?

  4. If cash has a 0% expected return, why hold it at all in a retirement portfolio? If the only purpose is to reduce volatility of the portfolio, with such a long time horizon and a single purpose to the portfolio, wouldn’t other assets with a positive expected return be better? In fact, I think cash does have a very small expected return, something like 0.5% based on data I’ve seen.

    Good post though since the vast majority of people don’t even have a portfolio policy. Your sample shows it needn’t be a complicated matter. Just having one and writing it down made me think about why this and why that. It also really helps me with the self-discipline to avoid reacting to short-term market events.

  5. I love this. So much so that I might just use it as our own. :)

    Canadian Investor’s right – this post shows that creating an investment policy statement doesn’t take a lot of work and keeping it handy can help prevent you from straying from the plan. I especially liked this “No individual stock position is allowed to exceed 10% of the overall portfolio” and, for myself, might take it one step further and say: ALL individual stock positions may not exceed 20% of the portfolio (to prevent from straying too much from indexing, which is our primary investment strategy).

    Great post CC – thanks!

  6. Canadian Capitalist

    Charles: You’re right. I purposely left out addition of money and modeling if the addition plus assumed growth will allow us to hit the targets. Feel free to modify.

    CI: You may be right that cash has a 0.5% real return. I’ll have to look up Stocks for the Long Run. We could get into a debate on whether cash even has a place in a retirement portfolio. I think it does as it reduces overall volatility and provides liquidity when it might be most needed. There is an opportunity cost for the 5% sitting in cash and some might reasonable decide that the advantages may not be worth it.

    telly: I think our investment policies are very similar. For me, aggregate stock positions may not exceed 25% (I don’t want to pay 0.55% for the REIT ETF).

  7. CC: I see your point with REIT. We don’t hold any REIT’s as we have two rental properties (despite the fact that we actually don’t include their values in the overall portfolio) so our policies are defintiely very similar wrt to stock positions.

  8. Cash has a positive return? Shouldn’t it be a negative real return?

  9. Canadian Capitalist

    nobleea: The real return assumptions are pre-tax. I’ll update to reflect that. I’ll check what the real return on cash it. I do seem to remember that it is slightly positive (before taxes, of course).

  10. I would go further than CanadianInvestor and ask why hold cash or bonds for the long term? Unless you plan to time the market, I don’t see why you would want to hold an investment with inferior expected returns. It is true that adding a small percentage of an uncorrelated asset can boost overall portfolio expected returns, but this only applies when the expected returns of the two assets are fairly close. The gap between bonds and stocks is too wide for this. The comfort that comes from the reduced volatility of holding bonds comes at too high a price in my view.

  11. Canadian Capitalist

    Michael: The question is if an investor can handle the market volatility that comes with an all-stock portfolio. While 25% in bonds and cash might sound too conservative for you, others may find it too aggressive. Long-term equity ownership is beneficial only if the investor has the fortitude to hold through short-term volatility.

    I’m not saying that adding bonds or cash doesn’t reduce returns. It does though some of it is offset by rebalancing. The question, then is: Is the investor willing to give up a bit of the return in exchange for lowered volatility? I think the answer will be different for different people.

  12. Canadian Capitalist! Bravo…A template for an Investment Policy Statement is an incredibly useful tool for your readers. Canadians (well, your wise readers) are better off for you!

    I wanted to include a suggestion to have your financial advisor include the meetings that he or she will be committing to conducting every year. Whether a phone appointment or a face-to-face, setting the frequency of these meetings helps set your expectation. They should also have a minutes of what they’ll be going over with you, so, for one, you can come better prepared and can get more out of it.

    Below is an excerpt from a comment I left a couple days ago. As the comment was left a couple days after posting, it might have been missed. It details the importance of setting absolute and relative benchmarks on your IPS to help you adequately assess the quality of your financial advice:

    During the process [of setting an Investment Policy Statement], it’s a great idea to set absolute and relative benchmarks with your advisor. Regarding your absolute benchmark, have they taken your income, risk tolerance, annual expenses and the age you wish to retire and given you the annual rate of return needed to achieve your financial goals? This is known as your absolute benchmark and making this rate of return understood holds the advisor more accountable. Keep in mind, this number is come up with by your advisor and yourself strictly paying attention to your personal circumstances….the ups and downs of the market are not to be taken into consideration, just your needs.

    On the other hand, the relative benchmark tells you the performance of your investment portfolio relative to a market index. As a client paying for full-service advice, you’re looking for investments to do better than their respective index, otherwise you could seriously reduce your fees by investing in index funds or ETFs and also get better returns in the process. Has your advisor set appropriate benchmarks with you? If not, visit http://www.showmethebenchmark.ca set up by Warren MacKenzie and a collection of other fee-only advisors.

    By comparing your relative benchmark to your returns, it is an excellent way of judging your financial advisor’s performance, while the absolute benchmark makes your expectations clear. These tools help greatly in assessing your financial advice.

  13. What a great post. I don’t think there is a better way to begin a relationship with an advisor than having an IPS written. I agree with previous comments regarding risk tolerance. It really helps to drive the overall investment strategy.

    A couple of points that I would add include are diversification by style, sector and market capitalization. Although research shows that over the long term, growth stocks and value stocks tend to provide similar returns, they do so at different times. By balancing both within your portfolio, you avoid the risk of being in the wrong style at the wrong time. With respect to sector, if someone had all their money in “conservative” banks, financials and REITS, with nothing in energy and agriculture, their returns over the last couple years would have been hurt. In terms of market capitalization the same holds true. However, because smaller companies can be riskier, they are definitely not suitable for everyone.

    The only issue I would question is the 10% limit on any one stock. That might be too high for most investors. Having 10% in one company might help someone hit some home-runs, but if they are concerned about striking out, then limiting it to say 5% (or less), might be a little more prudent. Even a company that someone might think is really conservative, for example a bank stock can drop a lot. CIBC is down 40% over the last 8 months.

    Creating an IPS really helps you to focus how you invest. And the only thing more important than creating one, is sticking to it.

  14. Canadian Capitalist

    Thanks for your comments Zahid and Mark.

    Mark: I don’t believe in slicing and dicing based on growth vs. value, small cap vs large cap etc. and totally against dividing the market into sectors. As a passive investor, I believe is owning everything weighted by their market capitalization.

    Note the further restriction that only 25% of the portfolio can be in direct holdings in stocks. You’re right that 10% may not be appropriate if it means that an investor can hold 10 stocks or less. The policy restricts all foreign equities to ETFs and avoids this problem.

    Zahid: This IPS is for DIY investors. As a passive investor, benchmarks are irrelevant because your portfolio is the benchmark. Don’t get me started on beating the benchmark. Suffice it to say that precious few do it and it is close to impossible to find the ones who would beat the index in advance.

  15. Canadian Capitalist

    Canadian Investor: The real return on T-bills over a 200-year period is 2.89% compared to 3.56% for bonds and 7% for stocks. An expected real return of 1% from cash might be more appropriate. I’ll update the post accordingly.

  16. I like the way Zahid jumps in and makes it sound as if it’s only natural to include a costly investment advisor when you already have an investment plan. IMO there are 2 parts of investing. 1) Coming up with an overall strategy and 2)chosing the individual investments to fill it.

    An investment advisor can help you with both. For those with a lack of knowledge on planning, a good advisor could be of help, though expensive help. Using something like CCs plan, you’ve got what you need for an overall strategy. Is it the best? Probably not, only time will tell. Would a strategy put forward by an investment advisor be any better? Probably not, and if you’re dealing with a bad advisor it could be much worse. (ABCP anyone?)

    As for the advisor’s help in chosing investments, if they could consistently beat the market, they would be much better off investing for themselves and getting really rich. A monkey with a dart board would suffice in chosing investment(although make sure the monkey only has basic, low cost investments at which to throw.)

    Thanks for the guideline CC. For now, I’m going mostly into equities and keeping a decent amount of cash in a savings account. I’m anticipating rising interest rates to fight inflation, and when things start looking good I’m going to lock in some long term fixed income investments.

  17. Okay, guys. Touche. It actually didn’t occur to me that it was an Investment Policy Statement strictly for DIY (I did notice the passive management approach, but I thought it was just the stance for that particular plan). I stand corrected.

    By the way, Al, just a respectful correction….I’m making it sound like it’s only natural to include an investment policy statment when you already have a costly advisor [Not the other way around: “…only natural to include a costly investment advisor when you already have an investment plan”].

    The most recent statistic I can find [2002] is that only 15% of financial advisors have proper investment policy statements for their clients. Now, of course, I’d imagine this number has improved in 6 years…but it has not reached the mainstream. Seeing one on a blog, just made my heart skip a beat. They need exposure. It’s great to have one as a DIY (it aids me, personally, in having structure and self-discipline), but the importance to a full-service client, who in many cases aren’t as welll-versed, is monumental. Full-service financial advisors might refrain from having a comprehensive one perhaps because it gives them a blueprint for the clients’ expectations to be based on.

    They can actually be evaluated.

    Again, I apologize for my confusion.

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  19. Great post. I am going to prepare a Investment Policy Statement for my family.

    Question: Can you provide any recommendations for Emerging Markets Index ETFs with the lowest MERs?

    Thanks!

  20. Canadian Capitalist

    David: Check the archives for VWO. It has the lowest MER for an emerging market ETF.

    http://www.canadiancapitalist.com/2007/04/24/a-tour-of-etfs-vanguard-emerging-markets-etf

  21. I left a previous company with a defined benefit pension plan. They are offering me 2 choices:
    1. Deferred pension of $530 biweekly (indexed), available at age 60.
    2. $61,000 transferred to a LIRA right now.

    I’m currently 35. Leaning towards moving it to a LIRA so I can have more control over it and have a better picture of my overall investments.

    Any thoughts?

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  25. Really like this post. I am creating one for my family!

    My two cents: I am adjusting down Bonds to 15% total, and putting the extra 5% in emerging markets (for a 10% weighting). This is to reflect that conventional wisdom today suggests that over the next 5 years (probably an appropriate time frame for this document to sit unadjusted) emerging markets will out-perform and Bonds will under-perform.
    I would be interested for thoughts on whether asset allocation should reflect a bit of market expectation rather than just using set weightings for age and risk tolerance. eg. what are the odds that this leads to a bit of outperformance.

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