VISTA, Calif. – An investment policy addresses how money in a portfolio is to be invested. It outlines the investor’s philosophy, values and beliefs, time horizon and risk tolerance.
Why is an investment policy necessary?
Think of it as a road map for wealth. It is meant to provide guidance for the investment and management of the funds.
There are four basic steps in creating an investment policy.
First, define the mission and goals of the portfolio.
There may be multiple portfolios. For working individuals, one portfolio may be strictly set aside for retirement savings. Another portfolio may be used for major purchases, such as a house, a business,
or returning to college. A
third portfolio may address leaving an inheritance to heirs and charity.
For tribal institutions, one portfolio may be used to manage existing grants. Another portfolio may be earmarked as a long-term investment, while a third may hold funds for minors.
Second, determine the dates or schedule of when money is to be used. Each of these purposes has a time horizon, a date and/or schedule for when money is to be used.
In the case of retirement, many people set a particular date to coincide with Social Security benefits. Tribal members who receive substantial revenue distributions and per capita payments may be able to retire early, but take precaution that compacts for gaming can come and go with political winds. Therefore, it is advised for them to set aside enough tribal distributions for retirement at “normal” retirement age.
For people who are planning major purchases or going to college, the funds will be used within months and years. Create a schedule for the frequency of these expenses, such as regular mortgage payments, or books, tuition and board for college.
For tribal accounts, funds for projects and minors’ trusts have finite dates of use. Other monies may be segregated as perpetual savings, whose principal must be protected, but earnings may be used.
Third, clearly state the investor’s philosophy.
Most investors look for opportunities where they anticipate good returns. Beyond this, some investors want to make money from businesses that reflect their values.
Even money in the bank is an investment because they pay interest. While the fixed income market trades internationally, some depositors prefer to work with their local or Indian-owned banks.
Others have their accounts with federal credit unions because they are member-owned and nonprofit.
While investing in equities or shares of stock, an investor can select investments based upon management approach. These values can range from environmentally conscious, socially responsible firms that respect Indian sovereignty, or brands of goods and services that are known and used in Indian country.
Finally, develop a risk tolerance profile.
Once the mission and goals, time horizon and investment philosophy have been established, a risk tolerance profile needs to be developed.
While risk is commonly associated with the loss of capital, the market value of any investment can go up or down daily. Volatility measures a security’s historical return and compares its potential downswing in value against its potential upswing.
A prudent person would look at the odds and avoid an investment where the downside is greater than the upside.
Despite an investor’s overall comfort level with risk, portfolios with a different purpose or time horizon will carry a different risk tolerance.
For example, a portfolio that is used for a tribe’s operating funds or a wage earner’s household bills will be dispersed in short order.
There can be no risk tolerated. Since these funds must be highly liquid, people would often forgo interest-earning opportunities and leave money in their checking accounts.
While a portfolio earmarked for major projects cannot tolerate the loss of principal at all, the money may not be liquid for some time. Therefore, the money can be invested in for a longer term in return for higher interest earnings.
A long-term investment portfolio is one where management can have seven or more years to generate profits.