Treating Your Portfolio Like a Business Startup

It’s time to move from theory to practice. You can know all about passive asset-class investing, but the real work begins now. Implementing a winning strategy starts with a single, foundational document: an investment policy statement.

This guide will walk you through creating your own investment policy statement (IPS) and putting it into action. We’ll also cover the value a financial advisor can bring and provide a checklist for finding the right one if you decide you don't want to go it alone.

Your Investment Plan: The Most Important Document You'll Create

I’ve been involved in running businesses, consulting for them, and even sitting on public boards. The one constant I've seen is that success often hinges on having a solid business plan before day one. A business plan acts as a North Star, providing the discipline needed to stick with a strategy through thick and thin. And just like any good plan, it needs to be reviewed regularly to adapt to changing conditions.

Serious investors should treat their assets like a business. That makes an investment policy statement your personal business plan. The IPS is the foundation of your entire approach, outlining a prudent and personalized strategy for .

Meir Statman, a behavioral finance professor, explains why this is so critical. He notes that our own minds can be our worst enemies. He compares it to slamming on the brakes in an emergency—it’s an instinct, but with antilock brakes, a controlled pump is far more effective. In the same way, when the market drops, our instinct is to flee. When it soars, even the most dedicated bears can get swept up in the hype. These gut reactions are often counterproductive.

An IPS acts as your portfolio’s antilock braking system. It provides the discipline to stick with your plan and removes emotion from your decision-making, which is a crucial first step for .

Before you write your IPS, you need a clear picture of your financial and personal life. Your job stability, time horizon, and risk tolerance are unique to you and will change over time. It’s also vital that this document doesn’t exist in a vacuum. It should be part of a larger financial plan that includes insurance, estate planning, and taxes.

Step 1: Lay the Financial Groundwork

Start by listing all your financial assets and liabilities. Once you have a clear picture, you can begin.

First, make sure you have a cash reserve. A good rule of thumb is to have about six months of normal spending in a liquid account, like a money market fund. If your income is less stable, you’ll want a larger emergency fund.

Next, map out your forecasted cash needs for the next two decades. This includes big-ticket items like a down payment on a house or college tuition. This exercise helps you determine the minimum amount you should allocate to fixed-income assets to meet those needs.

Step 2: Test Your Nerves and Set Your Allocation

Now for the “stomach acid test.” Look at model portfolios and be honest with yourself about whether you could stick with your chosen allocation during the market’s inevitable downturns. Then, compare the fixed-income allocation from this test with the one from your cash-needs analysis. Choose the more conservative of the two.

Finally, consider your “need to take risk.” If this test suggests a more conservative allocation than you’ve landed on, you should seriously consider it. Remember, while more money is nice, you have to ask if the potential for greater wealth is worth the additional risk.

A tougher situation arises when you to take more risk than you’re comfortable with to reach your goals. Here, you face a few choices:

• Lower your financial goals.
• Increase your savings by cutting back on current spending.
• Accept the additional risk because the potential payoff is that important to you.

Before you take on more risk, remember that having options—like the ability to work longer or sell a second home—makes it more manageable. And always remember that things that have never happened before can, and do, happen.

Step 3: Put Your Objectives in Writing

This is where you formalize your plan. It’s a sanity check on your decisions. A friend of mine, Philip, is an extremely nervous investor. His risk tolerance test would suggest an equity allocation near zero. However, he also wanted to retire in 10-15 years, a goal that required taking on significant risk with an 80% equity portfolio.

He had to choose between sleeping well at night and retiring early. He chose early retirement, fully aware that it would cause him stress and that his resolve would be tested. By writing it down in his IPS, he committed to the process, understood the risks, and was better prepared for the bad days. This is is all about: making deliberate, informed trade-offs.

Here’s how to structure your written plan:

1. Write down what you want your portfolio to achieve. This makes it easier to track your progress.
2. Specify the exact percentage of assets you’ll allocate to equities and fixed income. Also, set rebalancing bands—the range you’ll let an asset class drift before you bring it back in line. For example, a target of 60% equity might have a range of 55% to 65%.
3. Plan to hold your most tax-efficient assets (like equities) in taxable accounts and your least efficient ones (like fixed income) in tax-advantaged accounts.
4. Decide on your investment approach. A passive strategy is generally most prudent. If you want some excitement, you can set aside a small portion (maybe 5%) for individual stocks or active funds, but make sure it’s accounted for in your overall allocation.
5. Establish a routine. Review custodian statements monthly. Check for rebalancing or tax-loss harvesting opportunities quarterly. Conduct a thorough review of your portfolio and IPS annually or whenever a major life event occurs.
6. You and your financial advisor (if you have one) should both sign the IPS. This simple act dramatically increases your commitment to the plan and minimizes future confusion.

The Eighth Wonder of the World: Saving Early

Perhaps the most important part of any strategy is a commitment to save as much as you can, as early as you can. Benjamin Franklin called compound interest the “eighth wonder of the world,” and for good reason.

Consider Sally, who starts saving $5,000 a year at age 25. She does this for ten years and then stops. Her friend Sam doesn't start until age 35, but he saves $5,000 a year for the next thirty years. Sally invested a total of $50,000, while Sam invested $150,000. Assuming a 10% annual return, by age 65, Sally’s portfolio would be worth about $1.4 million. Sam’s would be worth only about $820,000.

The power of compounding is undeniable. The true price of something you buy today isn’t just its sticker price; it’s the future value you gave up by not instead. Committing to your strategy early is the most powerful lever you have.

Should You Hire a Financial Advisor?

Even with all this knowledge, you might not feel comfortable going it alone. A financial advisor can act as a coach. Even the world’s best tennis players have coaches to provide strategy and discipline.

A good advisor can offer education, a winning strategy, and the discipline to stick with it. That last point is crucial. Studies have shown that investors often underperform their own funds because they engage in market timing or performance chasing. An advisor can be the barrier between you and a bad emotional decision.

A quality advisory firm adds value by providing access to academic research, ongoing education, and integrating your investments into a complete estate and tax plan. They can help you with everything from in the first place to complex tax-loss harvesting, acting as a quarterback for your entire financial life—a service especially valuable for those managing complex finances, similar to the needs of .

A Checklist for Choosing the Right Advisor

If you decide to hire help, here’s what to look for:

• Their approach should align with yours. If you believe in passive, diversified investing, find a firm that does too.
• To avoid conflicts of interest, work with an advisor who charges a fee for their service, not one who earns commissions from selling you products.
• Look for a firm with a team of professionals. No single person has all the answers across the entire spectrum of .
• Check references and licenses. Always review the firm's Form ADV, a disclosure document that details their strategies, fees, and any regulatory issues.

Never give an advisor a general power of attorney without legal counsel. A limited power of attorney is usually sufficient. Finally, make sure your assets are held by a reputable and insured custodian.

Good financial advice is an , not an expense. Bad advice, no matter how cheap, will always cost you dearly in the long run.