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Investor Policy Statement
Episode 189

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Episode Guide

Creating an investor policy statement is essential for managing your financial journey. Starting with defined goals, the hosts discuss their personal financial experiences, including significant debt repayment and the calculation of a financial independence target. Jonathan and Brad emphasize the importance of having a structured approach to investments and the role of emotional management during uncertain financial times. By detailing their own emergency fund strategies and investment allocation, they demonstrate how to maintain a clear understanding of one's financial position while navigating market volatility. Additionally, they stress the need for flexibility and periodic review of one's financial plans to adapt to changing circumstances, ensuring that listeners have actionable insights for crafting their own effective investor policy statements.

Episode Timestamps

ChooseFI Podcast Episode Show Notes

Episode Title: Investor Policy Statement: A Tool for Financial Confidence
Hosts: Jonathan Mendonsa and Brad Barrett

Episode Summary:
Creating an investor policy statement is essential for understanding your financial landscape, particularly in uncertain economic times. This framework articulates personal investment goals, manages emotions triggered by market volatility, and stabilizes financial plans. Brad shares his journey of paying off $168,000 in student loans, emphasizing pivotal components like emergency funds and investment strategies while highlighting the importance of adaptability in financial planning.

Key Topics Discussed:

  • Introduction to Investor Policy Statement

    • Definition and importance of an investor policy statement.
    • Why it should be established even during turbulent times.

  • Brad's Journey with Debt Repayment

    • Personal story of paying off significant student loans.
    • Transitioning to full-time podcasting and financial literacy advocacy.

  • Understanding Financial Independence

    • How to calculate your financial independence number.
    • Key numbers for financial planning and setting realistic goals.

  • Emergency Fund Discussion

    • Recommended amounts for emergency savings.
    • The psychological factors influencing emergency fund decisions.

  • Investment Strategy Breakdown

    • Breakdown of investment portfolios and strategies.
    • Discussing the balance between risk and security in investments.

  • Final Thoughts on Financial Planning

    • Importance of updating financial plans as life changes.
    • Communicating and aligning financial goals with partners.

Key Insights & Takeaways:

  • Investor Policy Statement Importance:

    • Outlines your financial goals and provides guidance in times of market volatility.

  • Financial Independence Calculation:

    • To calculate your financial independence number, multiply annual expenses by 25.

  • Emergency Fund Essentials:

    • Maintain 3 to 6 months' worth of living expenses in a readily accessible account.

  • Regular Review of Financial Plans:

    • Ensure your investor policy statement is adaptive to changing life scenarios.

Action Items:

  1. Draft your investor policy statement to clarify your financial strategies.
  2. Calculate and track your financial independence number to monitor your progress.
  3. Review and update your emergency fund regularly to ensure adequate coverage.

FAQ Section:

  1. What is an investor policy statement?
    Outlines your financial goals and provides a plan to achieve them while minimizing emotional decisions during market volatility.

  2. How do I calculate my financial independence number?
    Multiply your annual expenses by 25 to set a target for your financial independence journey.

  3. What should be included in an emergency fund?
    Cover 3 to 6 months' worth of living expenses to navigate unexpected financial situations.

Closing Remarks:

Thank you for tuning in to this episode of ChooseFI Podcast, where we help middle-class America build wealth one life hack at a time.

Creating Your Investor Policy Statement: A Guide to Financial Independence

Crafting an investor policy statement (IPS) is a fundamental step for anyone serious about their financial future. This strategic document summarizes your investment goals and risk preferences, providing a clear trajectory even amid market fluctuations. In this article, we'll explore the essential components of an IPS, how to navigate financial independence, and the importance of emergency funds, all derived from actionable insights.

Understanding the Investor Policy Statement

An investor policy statement is your roadmap for investing, clearly outlining your financial goals and planned approaches. Think of it as a living document that evolves with your circumstances and market conditions. It serves as a point of reference when emotions run high, helping you avoid panic and reinforce sound decision-making.

  • Draft Your Investor Policy Statement: Start by detailing your investment objectives—whether it’s saving for retirement, education, or a major purchase. Update this document regularly to reflect on changes in your life and goals.

Calculating Your Financial Independence Number

Understanding your financial independence number is crucial for mapping out your financial journey. This figure represents the amount you need to save and invest to replace your current income with passive income.

  • Calculate Your Financial Independence Number: To estimate this number, multiply your annual expenses by 25. For example, if your monthly expenses are $5,000, your calculation would be (5,000 x 12 = 60,000), and then (60,000 x 25 = 1,500,000). Knowing this number gives you a target to aim for in your savings and investment strategy.

The Importance of an Emergency Fund

An emergency fund serves as your financial safety net, crucial for managing unexpected expenses without derailing your investment strategy. The guideline is to save between 3 to 6 months of living expenses.

  • Maintain a Robust Emergency Fund: Store 1-2 months of expenses in a readily accessible savings account. The remaining 3-6 months can be held in high-yield savings accounts or other safe investments that remain liquid, allowing you to cope with emergencies without needing to withdraw from your portfolio during market downturns.

Crafting Your Investment Strategy

When crafting your IPS, establishing a well-diversified investment strategy is vital. This strategy should include a mix of asset classes that reflect your risk tolerance and investment horizon.

  • Avoid Panic by Having a Clearly Defined Investment Plan: Set a clear strategy for your portfolio, such as allocating a specific percentage to stocks, bonds, or index funds. This helps reduce emotional decision-making in volatile markets. Regularly review and adjust your allocations as needed, but avoid making hasty changes based on short-term market movements.

The Role of Communication in Financial Planning

Effective communication within your household about financial matters is crucial. It ensures that both partners are aligned in their financial goals and understand the strategies being used to achieve them.

  • Encourage Open Communication About Financial Decisions: Regular discussions with your partner about the IPS, your goals, and any updates can foster a collaborative atmosphere. Use these conversations to reassess your goals, expectations, and any potential changes to your financial landscape.

The Importance of Flexibility in Financial Plans

Your financial plan should not be static; it should evolve as your life circumstances change. Whether it’s a new job, a change in family dynamics, or a shift in market conditions, flexibility is essential.

  • Regularly Revisit and Adapt Your Financial Plan as Life Changes: Life can present unexpected challenges and opportunities. Allow your IPS to evolve—add new goals, adjust your allocations, or shift your investment strategy based on your current situation and projected needs.

Actionable Takeaways for Your Financial Journey

To effectively implement what you've learned, consider these actionable steps:

  1. Create your own investor policy statement. Draft a document that outlines your financial goals, risk tolerance, and investment strategies. This will serve as your blueprint for decision-making.
  2. Calculate your financial independence number. Understand your long-term financial goals by determining how much you need to save to achieve financial independence.
  3. Review and update your emergency fund regularly to ensure you have adequate coverage for unexpected expenses.

Conclusion: Building Your Financial Future

By taking the time to create and maintain an investor policy statement, you empower yourself to make informed decisions about your financial future. Understanding your financial independence number and maintaining an emergency fund are critical steps in ensuring long-term success. Remember, flexibility and communication are essential components of any solid financial strategy—this is your life, and it should work for you. Let your IPS guide you on your journey toward financial freedom.

An investor policy statement lays out your investment plan. It's a tool to use when times get tough and your emotions have the potential to interfere with your long term investment strategy. It is to be created when you have a clear head and are not under stress. You make your plan as to what your asset allocation is and when you will sell--and when you won't sell.

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Related: How To Create An Investor Policy Statement

Finding Your Financial Independence Number

To find your FI number take your average monthly living costs and multiply it by 12, to get your annual expenses. You are considered FI if your investments are earning enough to cover your living expenses. General recommendations are that you can withdraw 4% of your balance each year without ever touching the principal--creating a perpetual money machine.

If you are assuming a 4% withdrawal rate, you can multiply your annual expenses by 25 to get your FI number.

Example: Monthly expenses of $5,000 per month equal annual expenses of $60,000 per year. $60,000 x 25 gives us a Financial Independence number of $1.5 million. This person would be considered FI, assuming a 4% withdrawal rate.

However, the 4% withdrawal rate is contested. The original study didn't take the early retiree into account. Does the formula work for a 30-year retirement? If you'd like to be conservative in your estimates you can use a 3% withdrawal rate, as suggested by Big ERN.

At a 3% withdrawal rate, someone with $5,000 per month in expenses would need a nest egg of $2 million to be considered FI.

https://www.youtube.com/watch?v=rLAsKPKJjno

Investments

Your emergency fund is an important part of your investment plan. Jonathan keeps three months of expenses is in a high yield savings account at CIT Bank, earning 1.25%

He keeps the rest of his emergency fund he keeps invested and has in his investor policy statement that he is allowed to sell enough of his investments to fill his high yield savings account to a full six months of expenses. He has given himself permission to sell that amount out of panic.

His retirement accounts are in 100% equities and all in index funds. His taxable investment are with M1 Finance.

Jonathan's taxable investments are allocated as such:

  • 75% in VTI (VTI is the ETF version of VTSAX)

  • 15% Paul Merriman's Ultimate Buy And Hold Portfolio

  • 10% is in individual stocks

M1 Finance is commission-free and automatically keeps your 10% allocation in place. Any new money deposited into the account will go towards rebalancing your portfolio.

Here's a full review of M1 Finance.

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