Question

Draft an individual investment policy statement as a guide to your future investment planning thus bringing out the advantages of having an investment policy statement

Answer 1

Solution:

(Name of Individual, aged)

ITIN: xxx-xx-xxxx

Annual Income: $ 50,000

(date)

Objectives:

10 year horizon assumed for:

- Providing funds for high school education of 2 children

- Providing funds for retirement age

- Providing funds for life insurance cover

Goals:

Create a corpus of $ 500,000

Minimum liquidity of $ 7,500

Minimum return on investment of 5%

Asset Allocation:

40% comprising of blue chip and mid-cap stocks and equity mutual funds

45% comprising of U.S Treasury bonds and Municipal bonds, debt funds and bank certificate of deposit

15% comprising money market funds and checking accounts

Prohibited investments:

- Derivative instruments

- Commodity trades

- Real Estate

Acceptable risk tolerance: Conservative

Investment shall be done within the above asset allocation framework; however, if the loss exceeds 10% of the funds invested the investor shall be moved to a lower risk asset allocation of 20%, 65% and 15% for a period of 6 months thereafter. Allocation of savings to these asset classes is to be maintained at all times even though minimum return criteria is breached. The minimum return criteria is only meant to serve as a guideline as to what is the ideal return.

Tax Policy:

Since the securities in the asset allocation shall fall under taxable or non-taxable, the financial advisor shall have discretion to determine the best possible allocation to ensure that there is a chance to generate capital gains wherever possible. Further, if there are capital losses, the financial advisor shall to the best of his ability ensure that these are off-set against capital gains that arise in future.

Responsibilities and Duties of the Financial Advisor:

1. Identification of the individual securities in the above asset classes

2. Appointment of custodian to ensure safety of assets

3. Periodic performance monitoring of portfolio & providing monthly reports on asset profile and quarterly reports on return.

4. Suggesting changes if necessary to the holdings and after consent making those changes within a week

5. Ensuring that the costs of all investments are reported to the individual

The Financial Advisor shall ensure at all times that he shall abide by this Investment Policy and shall not take any actions that are contrary to the objectives unless specific written consent is obtained of the investor.

This Investment Policy is expected to provide a sound framework to the financial advisor towards achievement of the objectives in the order listed above and if at any time he is of the opinion that these may not be achieved he shall duly intimate the investor of this along with the reasons or assumptions based on which he arrived at such opinion.