Developing Your Investment Club's Investment Policy Statement


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Every investment club should have an "Investment Policy Statement" outlining the objectives and goals of the club and its portfolio. This is the accompanying handout for ICLUBcentral's Club Operations Webinar held on February 15, 2011. For more information, visit the Learning tab at

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Developing Your Investment Club's Investment Policy Statement

  1. 1. 2/16/2011 by Doug Gerlach ICLUBcentral Inc. February 2011} Document created for clients or customers.} Drafted by portfolio managers, mutual fund managers, pension fund managers, other institutional investors.} Outlines basic criteria used to select investments.} Clubs should adopt this practice as well. 1
  2. 2. 2/16/2011} Enforces consistency.} Prevents club from getting sidelined in investments that are not suitable for club.} Helps clubs become successful investors.} Helps with member recruitment.} Club should spend some time (several meetings) discussing and considering their goals.} Consider convening committee to draft statement for discussion.} New clubs may create general statement at first, then refine over time.} Document can certainly change as club matures. 2
  3. 3. 2/16/2011} Typically includes: ◦ Investment goals & objectives. ◦ Allowable assets. ◦ Asset allocation. ◦ Risk tolerance. ◦ Portfolio & rebalancing guidelines. ◦ Minimum investment amount in a security. ◦ Stock selection guidelines. ◦ Other considerations.} Identify investment objective: ◦ Long-term Growth ◦ High-Yield ◦ Current Income} Most clubs would strive for long-term growth of portfolio. 3
  4. 4. 2/16/2011} Identify types of securities club may and/or may not purchase: ◦ Stocks ◦ ETFs ◦ Mutual funds ◦ Options ◦ Bonds} Most clubs invest solely in stocks, perhaps allowing funds & ETFs.} Identify how much of portfolio is to be invested in different asset classes (stocks, bonds, commodities, real estate, etc.).} Most clubs should aim to be 100% invested in the stock market. 4
  5. 5. 2/16/2011} Identify level of volatility club is comfortable with.} “Risk” can be defined in many different ways.} Most clubs would acknowledge that short- term risks of investing in stocks is offset by long-term rewards.} Identify how club aims to diversify holdings.} Maximum that can be invested in any single company/industry/sector.} How rebalancing will be done.} Most clubs would follow BetterInvesting guidelines: ◦ Diversify by company size. ◦ Diversify by sector/industry. ◦ Don’t sit on cash. 5
  6. 6. 2/16/2011} Identify minimum amount that can be invested in a single security. ◦ Amount would likely grow as club gets bigger.} Most clubs should strive for minimum investment that keeps commissions below 1% of cost.} Identify criteria that guides individual stock selection.} Most clubs should follow Toolkit 6/BetterInvesting methodology: ◦ Positive Sales & EPS growth. ◦ Stable or growing pre-tax profits. ◦ Selling at reasonable P/E Ratio. ◦ Reward/Risk Ratio > 3:1. 6
  7. 7. 2/16/2011} Do you undertake special effort to consider or avoid: ◦ Ethical, socially responsible, or “green” companies. ◦ “Vice” stocks. ◦ Local companies. 7