Recently I have come upon a worksheet that some might find a handy tool for their risk assessment process. This worksheet tries to asses your overall risk-taking capacity and to give a numerical score on your risk tolerance along with suggesting sample asset allocations. Not very sophisticated but at the same time neat and insightful.
Risk Assessment Quiz (doc file, 43KB)
This quiz is designed as a starting point for financial discussions. It should not be used to make final decisions.
Showing posts with label Investment Policy Statement. Show all posts
Showing posts with label Investment Policy Statement. Show all posts
Nov 15, 2008
Oct 21, 2008
Creating Your Investment Policy Statement II
Part II – Practice
Although each Investment Policy Statement (IPS) is very personal, it bears certain features which are nicely summed up in the Morningstar’s Investment Policy Worksheet (pdf). This document is only two pages long but full of vital questions that each investor should address.
The worksheet’s leading section is called Executive Summary and serves as an overview of your current situation and what you expect from your portfolio. Oncce filled in, it is advisable to update it whenever you rebalance your portfolio.
The next two sections ask you to state your objectives and put in plain language your investment philosophy. The last two sections refer to your investment selection criteria and monitoring procedures.
The worksheet is an excellent start for constructing your IPS although it does not address critical issues like liquidity and reconciliation of your ability and willingness to take risk. See Part I for more clues on that. Another feature that also could be elaborated is the list of available asset classes briefed into the Executive Summary. The lack of commodities and no split of bonds into government and corporate strike at first glance but here the illustrative nature of the Worksheet seems much more important.
Although each Investment Policy Statement (IPS) is very personal, it bears certain features which are nicely summed up in the Morningstar’s Investment Policy Worksheet (pdf). This document is only two pages long but full of vital questions that each investor should address.
The worksheet’s leading section is called Executive Summary and serves as an overview of your current situation and what you expect from your portfolio. Oncce filled in, it is advisable to update it whenever you rebalance your portfolio.
The next two sections ask you to state your objectives and put in plain language your investment philosophy. The last two sections refer to your investment selection criteria and monitoring procedures.
The worksheet is an excellent start for constructing your IPS although it does not address critical issues like liquidity and reconciliation of your ability and willingness to take risk. See Part I for more clues on that. Another feature that also could be elaborated is the list of available asset classes briefed into the Executive Summary. The lack of commodities and no split of bonds into government and corporate strike at first glance but here the illustrative nature of the Worksheet seems much more important.
Oct 19, 2008
Creating Your Investment Policy Statement I
Part I – Theoretical approach
The Investment Policy Statement (IPS) is your investment strategy in writing and helps you commit to a disciplined investment plan. It is an instrument to face your future financial goals today.
A well-constructed IPS is thought to address at least the following areas:
>your financial goals and desired/required return
>your willingness and ability to take risk
>your relevant investment constraints
It should usually set guidelines for constructing and monitoring a portfolio that can be expected to best meet your goals while remaining in compliance with any relevant constraints.
Stating your financial goal is not an easy task, but it a building block for your IPS. After all why bother to write a statement if this is not included. Each goal/goals should be detailed and accompanied by a possible way to meet it. Return objectives, which focus on rates that increase your current wealth or future savings, should always be addressed with the risk-return trade-off in mind. Increasing return increases risk or vice versa. The stated return objective will be useless if it does not take into account all relevant portfolio constraints.
Overall risk tolerance is a function of both your ability to take risk and willingness to take risk. Your ability can be expressed in numbers. Your willingness, however, involves a more subjective assessment. Reconciling both is a right step toward the proper portfolio.
The following matrix illustrates the reconciliation process:
The Investment Policy Statement (IPS) is your investment strategy in writing and helps you commit to a disciplined investment plan. It is an instrument to face your future financial goals today.
A well-constructed IPS is thought to address at least the following areas:
>your financial goals and desired/required return
>your willingness and ability to take risk
>your relevant investment constraints
It should usually set guidelines for constructing and monitoring a portfolio that can be expected to best meet your goals while remaining in compliance with any relevant constraints.
Stating your financial goal is not an easy task, but it a building block for your IPS. After all why bother to write a statement if this is not included. Each goal/goals should be detailed and accompanied by a possible way to meet it. Return objectives, which focus on rates that increase your current wealth or future savings, should always be addressed with the risk-return trade-off in mind. Increasing return increases risk or vice versa. The stated return objective will be useless if it does not take into account all relevant portfolio constraints.
Overall risk tolerance is a function of both your ability to take risk and willingness to take risk. Your ability can be expressed in numbers. Your willingness, however, involves a more subjective assessment. Reconciling both is a right step toward the proper portfolio.
The following matrix illustrates the reconciliation process:
In case you fall into the problem area, you should reconsider your options and address the mismatch early. Otherwise improper positioning will mean only future trouble.
Few portfolios have no investment constraints. Usually your portfolio constraints generally will fall into one of the following categories:
-Liquidity
-Time horizon
-Taxes
-Legal / regulatory environment
-Unique circumstances
Liquidity may range from very important to not applicable. You would not want to liquidate your portfolio in a depressed market in order to meet liquidity needs. Therefore good planning of portfolio liquidity may prove paramount for returns.
As for the time horizon, each portfolio could have several time horizons and this should be addressed in the IPS.
Few portfolios have no investment constraints. Usually your portfolio constraints generally will fall into one of the following categories:
-Liquidity
-Time horizon
-Taxes
-Legal / regulatory environment
-Unique circumstances
Liquidity may range from very important to not applicable. You would not want to liquidate your portfolio in a depressed market in order to meet liquidity needs. Therefore good planning of portfolio liquidity may prove paramount for returns.
As for the time horizon, each portfolio could have several time horizons and this should be addressed in the IPS.
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