Disclosing our Investment Policy Statement

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The Investment Policy Statement: The written document between a portfolio manager and an investor outlining the investor’s goals and risk tolerances. As a do-it-yourself investor, this is a written document written by me and for me. The concept always seemed elusive to me, but I finally set down and formalized my Investment Policy Statement. Credit goes to the White Coat Investor for originally introducing this idea to me the recent market volatility for forcing me me formalize the IPS.  Today we share the results!  

Investment Policy Statement
Rev: 01/2019

Goals: To have a portfolio that will support a lifelong sustainable withdraw rate of no more than 3.83%.

Investment Objective: Obtain at least 65% of the Total Market Return while not experiencing more than 65% of a Total Market Decline. In investment lingo, the portfolio should obtain a beta of 0.65%.

The introduction portion of our Investment Policy Statement is simple: We have achieved our number target investment number and sustaining a portfolio that lasts a lifetime is our overarching goal. If you have not yet achieved this goal, consider adding a section here about how you are going to save. (Salary deferral percentages, savings rates, types of accounts)

Investment Policy Statement Your pathway to success

Investment Strategy

Portfolio Mix/Index Funds

1) Keep more than 50% of invested assets in broad market equity index funds. These should include the Total Stock Market Index, Small/Mid Cap Indexes, and International Index Funds

2) Keep 50% or less of invested assets in a combination of the following: Bonds, Cash, Invidividual Stocks, REITs, and Alternate Investments.

I believe in low cost index fund investing for at least half of the portfolio. If you are in an accumulation phase, the investment portion of the Investment Policy Statement can be simple. The Total Stock Market Index Fund plus a Bond Market Index Fund at a reasonable 70/30, 80/20, or 90/10 portfolio many be appropriate for your situation.

The rest of the investment portion gets more advanced.

Individual Stocks

1) Individual stocks should be well researched and purchased with an intended holding period of more than five years.

2) The company should be profitable, have an identifiable “moat” for their business, and exhibit friendly activities towards shareholders without obtaining excessive debt levels.

3) We will be willing to sell companies that no longer meet these guidelines, even if it means incurring capital gains taxes.

4) Look for companies who’s customers line up to spend money with a company.

5) Read activist investor cases on companies.

6) When considering growth/excitement stocks, consider investing in a “basket”. It is difficult to know the final winner in disruption.

Individual stock investing is not for everyone. I enjoy the mental stimulation that comes from this, which is probably driven from my background of analyzing companies for business loans.  I used to think I could get a return higher than the market, but instead I’ve found a benefit of getting a return similar to the market with lower volatility.  Point #2 and #4 led me to invest in and own companies like Disney and Costco, which have a long term return similar to the market, but don’t correlate as much with the market. I keep a google news alert out for point #5, I’ve been fortunate to come across a few great companies/franchises with management issues and bought them at a great price.

Real Estate Investment Trusts (REITs)

1) REITs can serve as a mix between a stock and a bond.

2) The target REIT will pay a rate equal to at least 4% plus the consumer price index at the time of purchase. It must not have more than 55% funded debt to total assets.

I am a huge fan of REITs, especially when held in a tax deferred account. These are the only publically holdings that are completely free of taxes if held in the right account. REITs must pay out 90% of their profits and in exchange they are not taxed at the corporate level. If you then hold these assets in a retirement account, you are not paying income taxes personally either. The 10 year returns are near that of stocks and most of their return is paid in monthly or quarterly dividends.

REITs are a fund of real estate investments already, so I prefer to pick and choose the REITs I invest in instead of just buying an index such as VNQ. The spectrum of REITs in the index go from low leverage, low risk REITs to highly leveraged mortgage REITs. I prefer to pick a couple of good REITs and set limit orders to decide when an acceptable price is. REITs can move with interest rate announcements or stock market volatility, so you can usually pickup a good company at a 5-10% drop from its average if you are patient.


1) Bonds will be considered for part of our portfolio.

2) In addition to a bond index, we will utilize Vanguard’s Wellington/Wellesley Income Fund.

Bonds have been an underutilized portion of our portfolio, mainly because interest rates have been near zero and we’ve been in an accumulation phase. This allocation will be increasing in 2019. I have some bias towards active management with Vanguard because the price difference is so narrow. Vanguard’s Wellesley Income Fund is around 35% stock, 65% bond with a similar correlation to bond index funds and a slightly higher return. If my target bond portfolio is 10%, I would be okay owning 15% of our assets in the Vanguard Wellesley Income Fund.


1) The cash target will be between 5-10% of the Total Portfolio

2) Only dip below this target in times of total market uncertainty, as defined by a VIX ratio greater than 25. Cash should be recovered at VIX of 15 or below

3) Cash will ideally be held in a regular brokerage account and accessible as needed

Here we get into the start of some of the trading restrictions being placed on the investment portfolio. #2 outlines the specific requirements before I would attempt to “time the market”. Early in my investing career a wise person told me “when the bear rears its ugly head, throw money at it until it goes away”. That has been great advice during my asset accumulation phase, but the behavior must be retrained since asset preservation is more important than asset growth.


1) We will not use more than 5% of our total net worth in margin borrowings.

2) Margin will be specifically limited to strategic debt, such as:
• Making a purchase while waiting out tax season on the identified security to sell
• Investments in certain sectors/companies that are 20% or more off of their high
• Investments in advance of a known cash inflow

More trading restrictions! From time to time I’ve used margin borrowings with some benefit. These parameters are meant to specifically outline the margin restrictions since cash inflows will be coming to a halt.


1) Buying Put/Call Options will be limited to no more than 2% of our net worth.

2) Additional consideration will be made towards purchasing long-dated S&P put options as insurance if: The index is at or near a 52 week high and the VIX spread is below 12.

I have occasionally ventured into options for trading in times of large volatility, but have not made any better returns than just being a buy and hold investor. I’ve usually just been too nervous to stomach their volatility. If I venture into this again, it’ll be limited to no more than 2% of our net worth. The second point is something I’m considering to help achieve a lower volatility in the first few years of early retirement. A long dated put option (~2 years) is essentially insurance purchased up front against a large drop in the next 24 months.

Alternate Investments

1) We will consider alternate investments such as syndicated real estate, direct investment in private companies, private loans, and option exposure.

2) This allocation will not exceed 3% of our net worth in any one investment and not exceed 10% of our net worth.

3) This allocation will be revisited if overall net worth increases and/or various hobbies in early retirement begin producing income.

I am prohibited via my employment from making most alternate investments. The 10% limitation is an early target and will be reviewed in the future.

Part #2: Draw Down Strategy

1a) Non-Qualified Deferred Compensation Plan paid out over fifteen years.

1b) Use all but $100,000 of taxable investment accounts first. The combination of these two should provide five to ten years of living expenses depending on choices made around housing. Note: Taking a mortgage into retirement leaves us with significantly more cash, but also increases the monthly minimum expenses.

2) Utilize Roth IRA contributions. Currently there are 2.5x living expenses inside the Roth IRAs. This amount can be increased through strategically using a Roth IRA ladder. Specifically focus on converting Mr. Shirt’s IRA, as Mrs. Shirt’s IRA is the right size to utilize a 72t if needed.

3) Consider a 72t for Mrs. Shirt’s IRA. This is an ideal size IRA for a 72s with a low six figure balance, especially if the distributions start in our mid 40s.

4) Draw pension at at 55. The pension continues to pay a higher amount up until age 65, but it requires living until 75-78 to break even. There is no COLA adjustment inside the pension, so the early bias is to take the pension early, even if it is just added to the investments.

5) Charitable Contributions: We will utilize our donor advised fund whenever possible. Donations will be strategically made at times of “all-time highs” and attempt to use our most appreciated individual stock position(s).

The draw down strategies above are our initial run. We don’t entirely have our housing situation figured out and that plus any alternative investments we make will determine when we dip into #2 and #3 in our draw down strategy. I am fortunate to have worked for a company with a pension, but the pension does not have a cost of living adjustment. Its ultimate value will depend on how much inflation we experience between now and seventeen plus years from now when I can start drawing it.

I hope sharing the detailed policy statement above with comments will help you write or review your own Investment Policy Statement. I hope this policy statement serves as a great tool for me to review when I consider making a change. I can ask “Is this within the parameters of policy? If not, why?”. I hope it also reminds me to stay the course the next time the market drops by 20% or hits an all-time high. We have a 50+ year time horizon and want to make the portfolio last and thrive.

This is a work in progress and I welcome and comments/suggestions you may have.

3 Replies to “Disclosing our Investment Policy Statement”

  1. Great post! You a building an impressive blog with great information. What are your thoughts on putting money into a 401K vs ROTH 401K?

    1. I’m not a great personn to ask for an opinion on the Roth 401k, it only came available to me in the last couple of years. I would have considered it in my early working years, especially when my federal tax rate was below 15%, but when my marginal tax rate is above that I’m biased towards taking the deduction today.

      Why? The Roth IRA ladder strategy will allow me to convert dollars out of the 401k at a low rate if we keep our total income below $100,000. Standard Deduction plus 12% tax rate goes up to around $100,000 in earned income.

      There’s also the potential for tax rates/rules to change, diversity of types of accounts is important. I like having the up-front deduction of the 401k then just contributing the maximum to the Roth.

      Thanks for reading and the nice comments

  2. Great article. There are a lot of terms here that I don’t understand that I want to look into further. I bookmarked this for later reference (in my best articles folder), even though we are a ways off. Thanks for sharing! Now I just need to start my document.

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