We are all are trying to make money, but we all come from different backgrounds and have different financial needs. Some financial assets are only suitable for certain types of individuals, defined by their lifestyle and risk personality. We really need to understand our financial limits along with our financial objectives, that will tell us where to go, and this is key for investing money successfully.

Your Financial Objectives

Most of us do not take the time to state our investment objectives before putting our money into financial assets and this is a mistake. This is the purpose of an Investment Policy Statement and we should always have one when we are about to buy financial assets.

    Investment Policy Statement – IPS

    This important document will articulate precisely the steps you will need to take to reach your financial objectives, that is what you expect your invested money to achieve. This document can be simple or very complex, depending on your needs and risk tolerance. Your investment professional should produce one for you before putting your money into financal assets. In that document, you will learn about your risk tolerance and the type of financial assets that are suitable for you. This process should never be neglected to be successful in investing. See below an example of the chapters found in an IPS.

    1. Introduction
    2. Your Investment Objectives
    3. Your Time Horizon
    4. Your Risk Tolerance and Performance Expectations
    5. Your Asset Allocation
    6. Your Advisor Duties
    7. Terms of Agreement (with your signature)

Our lifestyle and the type of projects we want to finance with our invested money will determine the level of risks we can take and the financial assets we can buy in our financial portfolio.

Your Risk Personality

What defines our lifestyle ? Do we like to spend a lot of money on fast cars, and love extreme sports and the thrill of a risk ? Or do we prefer reading quietly in a sofa while enjoying the stability and safety of our home ? The main thing determining what financial assets work best for us is our capacity to take on risk.

Peter Lynch, one of the greatest portfolio manager of all time, used to say that: ‘the key organ for investing is the stomach, not the brain’. In other words, we need to know how much volatility in financial assets we can stand to see.

This is not an exact science, and while some core factors determine our risk tolerance, it’s important to remember that every situation is different and that a given financial asset is not the same to all people. Our Investment Policy Statement will help us identify ourselves in terms of risk tolerance and the financial assets that we can buy in full confidence.