How to Draw Up an Investment Game Plan

A plan will help you avoid the temptation to jump into the latest fad investment.
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You need to have a plan for your investment trip through life. Without one, you're prone to jumping onto hot stocks and making other desperate moves of immediate gratification, all of which will add up to very little success in investing.

In previous columns, I have talked about setting personal benchmarks, avoiding trendy markets, structuring a mutual funds portfolio and properly assessing its performance. All of these things are components of what investment advisers call an investment policy statement. I prefer to call it an investment game plan.

Before actually writing up your investment game plan, you may find it helpful to first establish the following:


  • A time period for which your portfolio is to be designed and evaluated.
  • Target rates of return.
  • Acceptable risk parameters.
  • An acceptable basis for evaluating your portfolio's performance.
  • Types of asset classes you'll invest in, such as stocks, bonds, real estate and cash.
  • The minimum and maximum of each asset class permitted in the portfolio, for example, 10% to 30% bonds and 70% to 90% stocks.
  • Liquidity requirements, if any.
  • Parameters within which the asset manager must perform.
  • Reporting requirements.

Your plan needs some objectives. Depending on your situation, you may want to set a minimum rate of return for the portfolio during a specific period of time. Or you may want to specify target rates of return for each asset class. For example, you may expect returns of 5% to 6% for bond funds, 10% to 11% for stock funds.

Another way to approach it is to set a target rate of return that is at least equal to the appropriate index. For example, you may specify that your small-cap stock fund target the rate of return for the

Russell 2000

index.

Or you may decide not to target a specific return but to specify that it be the highest rate feasible within the risk parameters you establish.

After you think about items on the checklist, get ready to do some writing. Your written game plan may only require two or three pages. It should include four parts. Let's look at a fictional example:

Your Situation

We are a family of four. One child is a junior in college, one is out of school and married with a good job. I am 51 and Mary is 48. I expect to retire at 65 and I'll want an income of $6,000 a month in today's dollars. We want our money invested in a quality portfolio of mutual funds. We have about $175,000, including money in a 401(k) and two IRAs. We can add about $13,000 a year to the investments. On the risk scale, we can go as high as 6 to 7 on a scale of 1 (low) to 10 (high). That means we wouldn't want to lose more than 10% in any given year. The purpose of our plan is to identify the way we can achieve a reasonable rate of return consistent with our risk tolerance over the next 14 years.

Statement of Objectives

The long-term investment objective is to have about $1 million of liquid investments in 14 years. We hope to achieve an annual return of at least 10% per year.

Definition of Investment Process

We think an asset mix of the following should fit our tolerance for risk and still meet our return objectives:


  • 20% bond funds -- short to intermediate term (part of the defense)
  • 80% equity funds (some defense, but mostly offense)

The specific allocation will take into consideration the time frame, expected rate of return, the amount of risk and our tax situation.

Regarding equity funds, we want managers (funds) in the following styles:


  • 20% to 80% large-cap value
  • 20% to 80% large-cap growth
  • 0% to 30% mid-cap value
  • 0% to 30% mid-cap growth
  • 0% to 30% small-cap value
  • 0% to 30% small-cap growth
  • 0% to 30% foreign

It is also acceptable to use managers that use a blend of value and growth.

The selection and retention of the mutual funds will be based on:


  • A manager's consistency of style. Does he remain true to his value or growth orientation?
  • The size of a fund. Is a manager taking in too much money and creating a management problem?
  • The risk level. Are the alphas, Sharpe ratios and standard deviations at acceptable levels?
  • Stock selection. Does the manager have the ability to pick good companies?
  • Stability of management. Has the fund had the same manager at least three years?
  • Expenses. Are they in line with the peer group (or, preferably, lower)?
  • Administration and operations. Is there a depth of staff?
  • Performance. Is it as good as, or better than, peer and appropriate benchmarks?
  • Global criteria. Are there unusual foreign issues that may cause us to exit a foreign fund?
  • Economic issues. What will be the effect of changes in interest rates or the inflation rate?
  • Political intervention. What will be the effect of any change in tax laws?
  • Personal goals. How will they change as we approach retirement?

Monitoring, Tracking and Evaluating

There should be a quarterly report that shows all holdings, original price, current price, number of units, current values and rates of return.

Returns should first be measured against the objectives identified in this game plan, secondly against a peer group of similar funds and thirdly against an appropriate index for each fund.

Was there a tremendous gain in one part of the portfolio, and should the portfolio be rebalanced to conform to its original allocation? Is any manager disappointing and should one manager be replaced with another? This is the point at which the artistic talents of an adviser comes to play.

There you have it -- your investment game plan. If you have an adviser, be sure to create the overall plan with him or her. Once you have a plan, you may be surprised at how easy it is to decide about the next trend or even that hot fund you heard about at last week's party.

Vern Hayden is a certified financial planner with the American Planning Group in Westport, Conn. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. Hayden welcomes your feedback.