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Investor Clinic

An investor's personal road map to wealth Add to ...

When the financial system seemed to be imploding a year ago, Karen Bryden knew not to panic. Instead, the retired public servant used the massive market selloff to scoop up a couple of bank stocks at bargain prices.

Wading into the market at the height of the crisis turned out to be an astute move: Stocks staged an explosive rally, rewarding those who were brave enough to buy when prices were low.

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So how was Ms. Bryden, a 64-year-old resident of Stittsville, Ont., who knew nothing about investing until a few years ago, able to keep her head when everyone around her was losing theirs? Easy: She had an investment policy statement, or IPS, to guide her behaviour.

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An IPS is like an investment road map. With it, an investor knows where he or she is going, how to get there and roughly how long it will take. Without it, he or she risks driving into the financial ditch, or worse, over a cliff.

Ms. Bryden's IPS is a six-page document that outlines the main elements of her investing plan, including her objectives, time horizon, return requirements, asset weightings and the qualities she looks for in a stock. The section of her IPS titled "Thoughts on Risk" was especially helpful during the market collapse.

It reads: "The great enemy of long-term investment success is fear. Fear leads to panic and the well-documented proclivity to sell good investments near market bottoms. The antidote to fear is a well thought-out investment plan ... and the knowledge that bear markets are temporary."

Her IPS, which is based on what she learned reading investing books, "has guided my investing and kept me out of trouble many a time," she says. Her husband, Charles MacDonald, also consults the IPS when making investment decisions. "It's a way to focus where you're going," he says.

Whether you're a self-directed investor like Ms. Bryden or you work with an adviser, having an IPS can help you clarify your goals, avoid pitfalls and pounce on opportunities. That's why financial experts recommend that every investor have one.

An IPS doesn't have to be as detailed as Ms. Bryden's, which includes footnotes and a bibliography, but it should cover certain topics including:

  • Asset allocation, or a desired mix of equities, fixed income, cash, precious metals or other investments.
  • Risk tolerance.
  • Objectives, such as capital preservation or growth.
  • Investments to include - and avoid. An investor may wish to focus on dividend-growth stocks, for example, and avoid leveraged exchange-traded funds.
  • Income needs.
  • Time horizon.
  • Tax considerations.
  • Benchmarks for assessing performance

For investors who work with an adviser, an IPS should clarify the relationship so that both parties have similar expectations. For example, it should state how often the client and adviser will meet, and what topics will be discussed.

"A good IPS will bring necessary discipline to both client and adviser - even more so if it is written in clearly understandable language," Michael Graham, Bryan Snelson and Cindy David write in their book Financial First Aid for Canadian Investors.

What's more, an IPS "will help to keep emotions in check through periods of market turbulence, when clients and their advisers will find they are better able to co-exist and work together," they write.

Clients who have an IPS can dramatically reduce the probability of running into conflicts with their adviser, says investor advocate Ken Kivenko, president of Kenmar Associates. For example, a good IPS will prevent an adviser from buying unsuitable investments - the biggest source of investor complaints - or from engaging in excessive trading.

If a problem does arise, the client can use the IPS as ammunition when seeking restitution. He cites the case of a senior whose money the adviser placed in volatile technology and emerging-market funds, even though the IPS clearly stated that the individual was concerned with capital preservation.

"We didn't even have to go to court," he recalls. "The firm said, 'With an IPS like that, we won't even argue, something went wrong, here's your money back.' "

An IPS can also save investors from themselves, adds Mr. Kivenko, who follows his own investment policy statement. "It's to keep me from screwing myself up," he says.

For Ms. Bryden, having an IPS kept her grounded when everything seemed to be coming unglued. That gave her the courage to buy - and to reap the rewards when the market rebounded.

"I said, 'Okay, this is not the end of the world,' even though there were a lot of people running around saying the sky is falling."

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