Investment Policy Statements: 5 Things to Know

Sometimes thought of as important for large organizations and foundations, an investment policy statement (IPS) can help guide you as an individual investor through the sometimes volatile world of investing. By definition, an investment policy statement is a strategy that includes policies and behaviors set in place to guide you toward meeting your life-long goals and objectives using financial resources.

1. Why Should You Have an IPS?

Why are you investing? What do you hope to accomplish? An investment policy statement forces you to clearly state the goals and objectives related to your investment strategy. The statement provides a blueprint to help you remain disciplined and focused about your goals and corresponding strategy. Additionally, through the monitoring process, an IPS can serve as feedback about your plan for reaching your goals and your corresponding investment strategies. (For more, see: An Example of an Investment Policy Statement.)

2. Goals and Objectives

Your goals and objectives should be part of your investment policy statement. Like any goal, your investment goals should be measurable and attainable. Additionally, your goals should reflect your ideals and values. What do you want to do? What is practical and feasible? Are there certain time periods that are key moments in your life? Such as a child beginning college? Is investing in sustainable and responsible investing important to you? Your goals should reflect these and other important issues.

3. Understand Your Risk Tolerance

Take an inventory of yourself and your reaction to large market swings, global economic news and political uncertainty. Know yourself and how you feel in these situations. If global events, such as Brexit or elections, leave you unfazed you may have a high risk tolerance. If not, and you're a little more skittish, that's okay too.  What's important is that you know who you are.

4. Develop an Asset Allocation That Reflects Your Goals, Level of Risk

Not everyone should be invested in the same way. Your direct investments should take into account your goals, your age, your comfort level with risk and your own personal timeline. Your asset allocation should allow you the best opportunity to attain your goals. As a result, investments and securities that are part of your portfolio should reflect all of these variables. Furthermore, your investment policy statement should include a timetable for monitoring your goals, your level of risk and your asset allocation.

5. Don't Do This Alone

There are plenty of ways to receive guidance on how to create and implement your own investment policy statement. First, do your homework. There are plenty of examples of investment policy statements online. Take a look and you'll see that most of the components are similar. Find one that meets your needs. Another way to do this is to consult a Certified Financial Planning™ professional. This person can help you articulate your personal goals and transfer them into an investment policy statement. She can help you determine what is important, measurable and attainable. And she will help you stick with the policy and monitor it over time. She will become your trusted advisor. (For more, see: 5 Steps to Build Wealth and Grow it Over Time.)

By Diane Manuel

Read more: http://www.investopedia.com/advisor-network/articles/111116/investment-policy-statements-5-things-know/

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6 funds you can own for $500 or less

Even with just a little seed money, you can find an attractive mutual fund to fit your needs.

The entry fee for many mutual funds is often upward of $2,500 -- an amount a lot of folks might consider too steep a price to commit to a single investment.

Young investors eager to get in the game might not have enough cash to afford those minimums yet. More-seasoned players might prefer to diversify their portfolios in smaller increments.

Whatever your reason, if you seek a good investment for $500 or less, consider buying into one or more of these no-load mutual funds. Collectively, the six funds, organized by the amount required for a minimum initial investment, don't necessarily constitute a balanced portfolio. However, these diverse offerings can help fill holes in existing portfolios or serve as building blocks for new portfolios. (All returns and related data are as of March 21.)

$100 funds

A low-cost index mutual fund, which is designed to mirror the performance of a broad market segment, can give you a solid investing foundation that's diversified and simple to understand. With just $100, you can reap the benefits of index-fund investing and make an initial investment in Schwab Total Stock Market Index (SWTSX -2.16%, news). It tracks the Dow Jones U.S. Total Stock Market index, which is made up of about 3,600 stocks. While the fund's current portfolio is primarily invested in large-company stocks, it also dips into medium- and small-caps, giving you a good sampling of the entire domestic market.

Best mutual funds for the long haul

Schwab Total Stock Market Index has done well over the past year, gaining 24.2 percent and outpacing the 23.3 percent return of the widely followed Standard and Poor's 500 ($INX -0.95%). Over the past decade, it has returned an average of 8.2 percent a year, ahead of the S&P 500's 7.5 percent annualized return and better than 85 percent of the funds in the "large blend" category. (Large blend funds invest in stocks with both growth and value attributes, and are fairly representative of the overall stock market.) The fund's annual expenses are a very low 0.09 percent.

Schwab also offers a set of target-date funds with low minimum investment requirements. Another easy core option for your portfolio, a target-date fund asks you to simply pick the year you want to reach your investing goal (typically, retirement), and the corresponding fund's managers take care of the rest. They select the appropriate mix of investments based on your time horizon and adjust the portfolio as your selected year nears.

For example, a 24-year-old aiming to retire at age 65 would opt for Schwab Target 2055 (SWORX -2.04%, news), which opened in January 2013. The fund requires an initial investment of just $100; annual expenses are 0.73 percent.

Being so young, the fund has little past performance to recommend (or disparage) it, but its older siblings -- guided by the same manager, Zifan Tang -- indicate a promising future. Over the past three years, Schwab Target 2025(SWHRX -1.43%, news) has gained 10.2 percent annualized, beating its category by an average of 1.8 percentage points a year and ranking it in the top 8 percent of all 2021-25 target-date funds. Since Tang took the reins in 2012, the fund has gained a total of 26.5 percent, topping its category by 4.9 percentage points.

One note on fund performance figures: Stocks have been on a tear since the last bear market ended in March 2009, resulting in outsized gains during the past five years. Over the long term, the average annual return of the stock market is closer to 10 percent.

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$250 funds

If you want to raise your portfolio's moral standard, consider this pair of so-called socially responsible funds, which invest according to clearly established principles. Amana Growth Investor (AMAGX -2.34%, news) and Amana Income Investor (AMANX -1.71%, news) are run in adherence to Islamic law, meaning they do not invest in businesses involving alcohol, gambling, tobacco or pornography. They also avoid businesses that charge interest, such as banks, and investments that pay interest, such as bonds. Both funds invest primarily in large companies, but the Growth fund focuses on fast-growing firms, while the Income fund seeks undervalued stocks that pay dividends.

The strategies, including the ethical code, have hindered the funds recently. "This bull market of the past five years hasn't been very favorable," says Morningstar analyst David Kathman. "With interest rates so low and money so cheap, it's given a boost to companies that aren't necessarily pristine, and those are not the types of companies that these funds own."