Comprehensive Investor Profile - Wilson Wealth Management

Developing a comprehensive investor profile is the first step in creating an Investment Policy Statement (IPS).

The investor profile documents who the investor is today. As well as where they want to go. This includes the individual’s: financial situation; investment objectives; personal constraints.

Financial Situation

To get where you want to go, you need to know where you are today.

It is easier to accumulate $2 million dollars in 10 years if you have $1 million today. Versus starting with nothing. And it is even easier to accumulate $2 million in 10 years if you begin with $3 million. But one path may be the wiser.

Personal Balance Sheet

Prepare a personal balance sheet listing all your assets and liabilities at market or realizable value. The liquidity of the asset will help determine the difference between market and realizable price.

There will be different liquidity considerations for bankable versus physical assets.

A common share traded on a major exchange should be more liquid than your house or vehicle. The more liquidity, the easier it will be to receive market value. The less liquid, the longer you may have to wait to obtain the market price should you want to sell. Or, the less liquid, the greater you will need to discount the selling price in order to make a quick sale.

The balance sheet provides a snapshot of your net wealth at the date of preparation. It will also provide you with your current asset allocation.

The snapshot occurs at one specific moment in time. You will need to monitor and update your situation periodically.

Be Holistic

Take a holistic view when developing an investment plan.

Often, investors “forget” about non-portfolio assets when calculating their investment strategy. Not forget about the asset, but mentally forget that it is an actual asset that needs to be included in the investment mix. If you own a house, then this is a real estate asset. It needs to be factored into your overall asset allocation plan or you will err in your calculations.

The same goes for assets such as pensions through your employer. You need to know what the pension is invested in, if anything, so that you can complement your own strategy.

Statement of Cash Flow

I also suggest preparing a statement of cash flow. What money is coming in the door each month and what expenses are being paid? Any excess is money available for investing.

More likely though, you will not have much, if any, excess. You should review your cash flows and look for ways to cut back in some expenses in order to generate investment ready cash.

This may require some budgeting work.

If you are not an accountant, no fear. There are a variety of inexpensive and easy to use tools to help create balance sheets, cash flow statements, and personal budgets.

Investor Objectives

We have considered investor objectives already.

Categorize Objectives by Time to Maturity

It is important to segment objectives into the short, medium, and long-term.

While you may not plan to retire for 40 years, you likely have near and intermediate goals that must be incorporated into your total investment planning. A car you want to purchase in six months requires near term financing. And the house you hope to buy in five years needs to be reflected in your IPS.

The closer the objective is in time, the less risk you want to take in the investment.

Categorize Objectives by Priority

You should also label each objective as high, medium, or low priority.

That way, if your wealth accumulation falls short of its targets at various points in life, you can still hopefully hit the high priorities.

Quantify Your Goals

In an IPS, I suggest that you try to quantify investment goals as much as possible.

Simply stating that you want to maximize your investment performance or achieve financial security by age 60 is not enough. It is easier to achieve one’s aims by setting specific and realistic targets. Then work backwards to develop an action plan on how to achieve the goal.

If you believe that you need $2 million in liquid assets at age 65 with which to retire, then you can set up various investment scenarios factoring in time to retirement, after-tax returns, and required contributions.

For example, if you are 25 years old, you have 40 years until 65. If you use a tax-deferred investment plan, you would need to invest approximately the following each month to accumulate $2 million by age 65: $125 at 13% per annum compounding monthly; $315 at 10%; $750 at 7%; $1300 at 5%; etc.

The combinations are endless.

And you can clearly see how the compound performance impacts the overall wealth accumulation. Be certain that every dollar (Euro, Franc, Pound, Yen, etc.) you invest goes toward an investment, not a commission, management fee, operating cost, and so on.

Create Milestones

In addition to quantifying specific goals, you should also quantify milestones along the way. Tracking progress as you work toward the ultimate target allows you to adjust variables and stay on course.

For example, perhaps your goal involves investing $500 monthly for 40 years with a 10% expected return. But over time your actual return is 6%. If you wait until year 35 to review your status, it is too late. There is almost no way to recover without a winning lottery ticket.

If you review after 5 years and find lower than expected returns, then you have more options. Make a lump sum investment to become whole. Increase monthly contributions to $1000 until you are where you should be. Or maybe increase portfolio risk to hopefully outperform moving forward. All have pros and cons, but you will need to adjust.

And for the record, I would recommend annual reviews. Possibly more frequent based on the volatility of your portfolio.

Investor Constraints

Individuals have many things that impact their ability to achieve their investment objectives.

We reviewed investor constraints previously. There are many factors you need to consider in your IPS.

Free Cash to Invest

A major constraint for many people is just in having the money needed to invest for one’s goals.

If you need to invest $1300 per month at 5% to meet your objectives, yet your take home pay is only $2000 per month, you will have problems achieving your investment goals.

An added incentive to begin saving and investing as soon as possible.

Three key variables greatly impact an investor’s objectives and constraints: time horizon, phase of the life-cycle; risk tolerance. We will discuss these keys next week.