Investment Masterclass – Write it down!

Ian King, Sunday January 26, 2014

An important commitment within any investment policy is to write it down.  It sounds simple and perhaps frivolous but most investors fail to undertake this simple step.

Written Record

Having a written record of your investment policy offers a number of advantages:

  • The process of writing the document down ensures that all factors and considerations are appraised prior to implementing the strategy, thereby reducing the likelihood of any errors of omission.
  • When a strategy is reviewed you have a ready made reference point via which performance for example can be measured.
  • The investment policy mandate gives you commitment to your strategy. At, say, a review if one part of the strategy has performed particularly well frequently investors may consider adding further to such positions, thereby increasing their dependency of this particular asset or fund going forwards. Such an approach is commonly flawed and given the law of averages the best performing sector of yesterday is commonly tomorrow’s laggard.  Having a written document which confirms the allocation to a particular opportunity and how exposure to this can be varied will help to stop temptation.  This benefit also works just as well in keeping investors from cutting poor performing, but valuable, assets or funds from the strategy.

Investment Policy Mandate

So, what needs to be covered within an investment policy mandate?  Well, the document needs to be personal to you and specific to the investment objective being considered.  Commonly investors will have multiple mandates to cover their varying investment requirements.

An investment mandate will commonly feature some, or all of the following:

  • The names of the owners of the strategy.
  • What assets the mandate covers and how these relate to all or part of the owner’s overall investable funds.
  • A description of the overall objective for the strategy (retirement, education funding etc).
  • A likely overall timescale for the strategy.
  • The requirement for growth and/or income.  In terms of the latter the income amount and frequency should be specified.
  • A proposed long-term strategic asset allocation for the portfolio (cash, bonds, commercial property, UK equities and overseas equities are the common main asset classes).
  • The benchmark indices which are to be used to measure performance (e.g. the FTSE All Share index for the UK equity element of the portfolio).
  • A guide to what the maximum expected drawdown (or loss) could be for the portfolio.  This is particularly important if the portfolio is being managed by an outsourced investment professional, such as a Discretionary Fund Manager (DFM).
  • A tolerance around the long-term asset allocation which any asset exposure can vary.  +/- 10% tends to be a common tolerance, so for example, a long-term exposure to UK Equities of 25% can comfortably vary between 15% and 35% depending upon market conditions.  Confirmation also needs to be provided of how long it would be permissible, if at all, for the portfolio to remain outside of these bounds.
  • The scope, or otherwise to include other assets within the strategy which are not covered within the long-term strategic asset allocation.
  • A cap on the exposure within the strategy to any one single share, bond or fund (10% of the total commonly makes sense),
  • A note over the frequency of both rebalancing and formal reviews (at least annually in both cases).
  • A note on the liquidity of the portfolio and any limit to including positions which could not be encashed within a certain time period.
  • Any applicable comments concerning the tax of the strategy.  For instance a portfolio which includes funds held both inside and outside of the ISA shelter may well suggest that certain types of assets should be held within the ISA component and vice-versa.
  • Confirmation over the term over which performance is to be measured.  A rolling three year basis is a standard.
  • Any specific items that need to be considered within the portfolio, for example ethical considerations, requirement to hold any specific assets in the portfolio etc.

Investment Mandate

I encourage all investors to write their own investment mandate.  If you are being advised by a planner you can ask them to provide you with one.  We are also able to provide you with further details of the type of mandate’s we prepare for our clients, so if this would be of interest to you please get in touch with us below or via

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One Comment

  • That was stimulating . I like your style that you put into your writing . Please do move forward with more like this.

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