In a world where inflation erodes the value of our money every second, the phrase "not investing is the greatest risk" is undeniably true. Holding cash idle inevitably leads to long-term financial decline. Conversely, jumping into investments without proper knowledge can cause severe losses and setbacks.
Achieving this balance requires a clear guiding plan, known in financial terms as an Investment Policy Statement (IPS), which acts as a principle and management plan to help us reach our financial goals.
Creating an IPS is not just for funds or the wealthy; it is a common household tool that keeps our emotions from overriding reason and helps balance our investment portfolio truly in harmony with our life’s pace.
Apichet Ekkawatpan, a financial advisor certified as AFPT, TM stated in the article "Invest Without Losing Your Way with an Investment Policy Statement" through the Thai Financial Planning Association that to reach desired savings and investment goals, having an appropriate investment plan is a key component.
Often, achieving financial targets through investing takes considerable time. Even when goals are set, risk tolerance assessed, funds allocated, and investment strategies established,
without recording these details, they tend to be forgotten, leading to emotional investment decisions that unnecessarily increase risk.
Additionally, Apichet recommended a process investors should undertake with a financial planner or on their own to build a good IPS, consisting of four key questions to ask yourself:
1. Define investment goals – this step is about clearly setting your "what" and "why" to keep direction steady, including:
Investment purpose – specify clearly what the funds are for, such as retirement.
Goal timeline – state how much time remains to save.
Expected returns – set target figures, remembering to factor in "inflation" which will increase future costs.
Acceptable risk – evaluate risk tolerance using a Suitability Test; higher risk tolerance may yield higher gains but also greater losses.
2. Identify constraints – this step surveys life conditions that will define your investment boundaries.
Liquidity needs – ask if you require dividends along the way or can invest long-term without withdrawals.
Investment asset types – specify asset classes of interest, such as bonds, corporate bonds, foreign bonds, common stocks, or gold.
3. Investment strategy – this step involves planning the "battle plan" to reach your goals.
Investment approach – choose your style: Passive, tracking the market, or Active, seeking to outperform.
Fund allocation – divide money into long-term holdings intended to be kept and short-term investments adjusted according to market timing for extra profit.
Rebalancing methods – set guidelines on whether and how to adjust your portfolio.
Asset selection criteria – define specifications for stocks or funds to purchase, such as growth stocks or industry-specific shares.
Investment method – determine whether to invest a lump sum or use dollar-cost averaging (DCA) monthly.
4. Monitoring and evaluation – this step checks your portfolio's health to ensure it stays on the right track.
Frequency – decide how often to review your portfolio.
Benchmark – choose a performance comparison, e.g., if investing in Thai stocks, compare returns with the Thai stock market index.
Evaluation criteria – set targets, such as achieving returns exceeding the stock market.
Portfolio adjustment (Rebalance) – a fundamental rule to reorganize when asset proportions deviate from the plan, for example, selling some stocks if they rise too much.
Trading guidelines – rules for selling excess assets or buying others to maintain investment proportions, or both.
Besides helping keep investment plans on course, IPS also enables investors’ managers to propose suitable investment products and provides a guideline to effectively assess and monitor portfolio quality.
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