Write a personal investment policy

A portfolio is not a list of things you bought. It is a set of claims assigned to named jobs, governed by rules written before fear or excitement arrives.

The policy comes before the products. Without it, each purchase can sound sensible in isolation while the collection becomes illiquid, concentrated, expensive, and impossible to explain. A written investment policy statement—an IPS—turns goals, constraints, and behaviour into standing instructions. This chapter is educational. It supplies a decision structure, not a personalized allocation, product recommendation, expected return, or tax conclusion.

Start with liabilities, not assets

Write every goal as a future cash-flow obligation:

Separate the emergency reserve and known near-term payments from long-horizon capital. A portfolio cannot bear volatility that its liabilities will not permit. As a goal approaches, its funding policy should reduce the chance that a market decline forces a sale; the timing and method belong in writing. Do not invent one permanent “risk profile.” Assess three different things.

Risk capacity is the financial ability to absorb loss or delay without missing an obligation. It depends on horizon, liquidity, fixed commitments, dependants, income stability, insurance, debt, and whether employment or business income falls with the same market.

Risk tolerance is the behavioural ability to remain with a sound plan through an uncomfortable decline. It is often overestimated in calm markets.

Risk requirement is the return the plan appears to need. If the required return demands risks you cannot carry, the correct response may be to change contributions, dates, goals, or income—not to find a more exciting product.

Assign roles to claims

Instrument labels are less useful than the claim underneath them.

Cash and near-cash claims serve immediacy and nominal stability. Their job is access, not maximum long- run growth. They still carry issuer, inflation, operational, and reinvestment risk.

Debt claims promise specified payments and usually rank ahead of ownership. Examine issuer credit, maturity, duration, seniority, collateral, covenants, currency, liquidity, and any right the borrower has to repay or alter terms. “Fixed income” does not mean fixed market value or certain purchasing power. Equity claims own the residual after employees, suppliers, authorities, and lenders are paid. Upside is not contractually capped, but neither are distributions promised; ordinary equity stands last in failure. Diversified ownership and one private-company stake are not the same risk merely because both are called equity.

Pooled vehicles are wrappers around underlying claims. Look through to holdings, concentration, total costs, valuation method, custody, redemption terms, and any mismatch between daily access and illiquid assets.

Real assets and operating businesses may provide use, control, cash flow, or inflation sensitivity, but commonly bring concentration, maintenance, legal, and liquidity risk. Value the whole burden, including debt and time.

Derivatives, structured claims, and speculative assets can transfer or amplify risk. Optionality and leverage may hide inside apparently simple packaging. If you cannot explain cash flows, counterparty, seniority, liquidity, and who owns each choice, the policy answer is “not yet.”

Diversify the failure modes

Diversification is not the number of accounts, funds, or line items. It is the reduction of dependence on one issuer, business, cash-flow driver, geography, currency, customer, property, platform, or economic outcome. Several holdings that fail for the same reason are one exposure.

Include human capital in the map. A technology employee paid by one company, holding employer equity, investing in similar companies, and living in a home financed by the same income is more concentrated than the brokerage statement suggests. A founder whose salary and net worth depend on one enterprise should not evaluate the rest of the household portfolio as if that enterprise did not exist.

Diversification cannot remove market-wide loss, inflation, or every crisis correlation. Its job is to prevent one avoidable failure from deciding the entire plan.

State the full cost discipline

Returns are uncertain. Many costs are visible before purchase. The IPS should require a total-cost view:

• • explicit commissions, platform charges, and transaction levies;
• • bid–ask spread, price impact, currency conversion, and exit friction;
• • recurring management, administration, custody, and advice costs;
• • penalties, surrender conditions, and opportunity cost of locked capital;
• • current tax consequences, verified rather than assumed.

Compare cost for the same economic exposure and service, not products with different risks. A lower fee does not rescue a wrong instrument; a sophisticated label does not justify an unexplained fee. Before a sale, switch, or cross-border transaction, ask a chartered accountant to check the current tax and reporting consequences. Do not let a tax benefit make the investment decision; it is one term in the decision.

Pre-commit the maintenance rules

Define how new contributions are invested, how often the portfolio is reviewed, what drift triggers rebalancing, and how goal funding changes as dates approach. A calendar rule, a tolerance-band rule, or a combination can be reasonable; the policy must state the chosen method and why it fits transaction costs, taxes, and behavioural capacity. There is no universal band or frequency.

When rebalancing is required, consider directing new contributions or withdrawals first. If sales are needed, examine costs and current tax effects before execution. Rebalancing restores intended exposures; it is not a claim that you know which market will rise next.

Also write the change rule. A policy may change after a material change in goals, dependants, income, health, law, or risk capacity. It should not be rewritten merely because prices moved or a friend prospered. Record the evidence, alternatives, reviewer, and effective date.

The one-page IPS

Your signed summary should contain:

1. purpose, household, and as-of date; 2. goals, horizons, liquidity requirements, and priority;

3. risk capacity, tolerance, requirement, and major correlated exposures; 4. permitted claim roles and explicit exclusions; 5. target exposures expressed as your considered ranges—not borrowed internet percentages; 6. contribution, rebalancing, goal-glide, and review rules; 7. total-cost and due-diligence rules; 8. behaviour rules for a severe decline, euphoria, tips, and borrowing;

9. amendment procedure, records location, and next review date; 10. professional handoffs.

For a personalized plan, material sum, complex product, concentrated founder position, or uncertainty about suitability, engage a SEBI-registered investment adviser after independently verifying registration and conflicts through the current official register. Use a chartered accountant for current tax treatment and an appropriate legal or insurance professional for connected obligations. A professional may improve the policy; no professional can make an unsuitable risk disappear.

· EF pp. 58–59, 97–104 · MM pp. 69–75, 96–105 · ASC pp. 22, 30–32, 36–39 · RM pp. 56–60, 66–74, 87–91, 121–124 · GE chs. 28–29. Mechanisms paraphrased; no allocation, product, return, tax, or rebalancing interval is prescribed.