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.
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.
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.
