Running your investment portfolio like a fortune 500 company
Since a general goal for many professionals is successful retirement planning, let's look at a typical Fortune 500 pension plan. A pension plan, also known as a defined benefit plan, is a vehicle that provides income to a retired employee of the company. This is where an Investment Policy Statement (IPS) comes into play. The Fortune 500 company, along with the investment managers and advisors, set specific guidelines on how the investment dollars can be allocated. This same strategy should be employed with your business and personal investment assets.
Here’s an example: Physician is 45 years old and has $1million in retirement assets.
After a financial plan has been completed and the goals of the Physician are set, the assets need to have a guideline on how they will be managed. The Investment Policy Statement states the following:
Minimum Target Maximum
Equities 30% 50% 65%
Fixed Income 20% 30% 40%
Alternative Investments 10% 20% 30%
(REITs, Managed futures, etc..)
Notice that only the target column will equal 100%. This is designed to ensure that the investments stay allocated for seeking the maximum potential return with the least amount of risks associated with that return. If the stock market has a tremendous run up - which causes the equities of the portfolio to go to the maximum percentage- you and your advisor can follow the Investment Policy Statement (IPS). This would require moving a percentage of the assets to the other categories, thus seeking to protect the profits and staying in the allocation.
History proves this philosophy. Many investors had great returns in the 1990s only to watch them dwindle away, along with a huge percentage of their principal, during the bear market in 2001 and 2002. A large part of this downfall was due to portfolios comprised of a dominating equity percentage. In a sense, this taught investors not to keep too many assets in one basket. Creating a balanced asset allocation and decreasing unpredictability can help everyone seek their long term financial goal of an increased return.
According to a study by Gary Brinson, Brian Singer, and Gilbert Beebower, “Determinants of Portfolio Performance II,” 91.5% of a portfolio’s returns are attributable to asset allocation while 8.5% are determined by security selection and market timing. That explains why large Fortune 500 companies rely on the Investment Policy Statement and why it would be wise to develop your portfolio similar to one of these companies. If the Fortune 500 companies’ planning and management of their investment portfolio is successful for them, then why shouldn’t it work for you?
Chad Olivier is owner of the firm The Olivier Group, LLC in Baton Rouge, La., which specializes in retirement planning and wealth management for physicians, dentists and other affluent individuals and families. Securities and Financial Planning are offered through Linsco Private Ledger Member NASD/SIPC. Please note that the above article is for informational purposes only. Financial planning requires detailed individualized analysis of each person’s specific situation.
CFP®, Certified Financial Planner™ and are certification marks owned by Certified Financial Planner Board of Standards Inc.
