Your Investment Constitution: Creating Rules You'll Actually Follow

Dear Fellow Investor,

Remember last month when we talked about portfolio rebalancing? Well, how do you know when and how to rebalance if you don't have a plan? That's where an Investment Policy Statement comes in. Think of it as your investing constitution – a set of rules you write when you're thinking clearly to guide you when things get crazy.

Why You Need This

Last year, I almost panic-sold during a market dip. What stopped me? I opened my Investment Policy Statement and read my own words: "We don't sell during market panic unless fundamental conditions have changed." Past-me saved present-me from a costly mistake.

Creating Your Investment Constitution

Here's how to write one that you'll actually follow:

1. The "Why" Section Start with your goals. Mine looks like this:

• Build wealth for retirement in 25 years

• Save for a house down payment in 5 years

• Create passive income streams

• Sleep well at night

2. The "What" Section Define your investment approach:

• Target asset allocation (stocks/bonds/cash/etc.)

• Types of investments you will and won't buy

• Risk tolerance level

• Time horizon for each goal

3. The "How" Section Your rules of engagement:

• When you'll rebalance

• What triggers a buy or sell

• Maximum position sizes

• Minimum cash reserves

Real Example: My House Down Payment Rules

Here's part of my actual IPS for my house fund:

• Goal: $100K in 5 years

• Risk Level: Conservative

• Allocation: 70% bonds, 30% cash

• No individual stocks for this goal

• Rebalance if bonds exceed 75%

Make It Personal

The best IPS reflects who you are. Mine includes:

• "No crypto trading after midnight"

• "No investing based on Reddit tips"

• "Always sleep on buy decisions over $5,000"

Why? Because I know my weaknesses!

When to Break Your Rules

Your IPS shouldn't be a prison. Include conditions for changes:

• Major life events (marriage, kids, career change)

• Significant market shifts

• Changes in goals or timeline

• Annual review dates

The Five-Question Test

Before making any investment, I ask:

1. Does this fit my IPS?

2. Which goal does this serve?

3. What would make me sell?

4. How does this affect my overall risk?

5. Would my future self approve?

What's Next?

Next month, we'll explore tax-efficient investing – because it's not what you make, it's what you keep.

Keep ascending,

Cash

Disclaimer: InvestorAscent provides educational content only. This is not financial advice. All investing carries risk of loss. Always do your own research and consult qualified financial professionals before investing.