6 Steps of Financial Planning (FPAS)
July 13, 2017
Dollar Cost Averaging (DCA)
July 30, 2017
When it comes to drafting Investment Policy Statements, CFA Institute proposes the following considerations for mulling. Naturally each consideration gets sub-broken into further detailed pointers to think thoroughly. But that’s for another day. If your advisor is not able to discuss and go through each of them with you during the advisory process, run away.
Risk
Price volatility is usually the measure of risk but the attitudes to risk are equally important. Different people view a given set of probability odds differently. For example, a 70% success rate may be acceptable to some but not for others.
Return
The required rate of return is a concept in itself with varying approaches. One of CFA institute’s approach is called the risk premium approach. Basic risk premiums like risk free rate and inflation risks usually imply (2%+2%) a basic expectation of 4% required rate of return. Other risk premiums exist and where applicable to be factored into the required return rate.
Taxation
Different arrangements may provide tax savings depending on the situation and tradeoffs need to be considered. In some jurisdictions, there is capital gains tax where in others there is not.
Time Horizon
There has to be a match for the timing of the future funding required. In an exaggerated negative example of a gross mismatch would be a regular premium 20yr endowment for tertiary education funding that will be required in 5yrs time.
Liquidity
Other than sensitivity to the budget constraints, the near-term liquidity requirements (i.e. Wedding/ Home Deposit) needs to be considered as well. There may also be emergency situations (i.e. unexpected medical investigations) that call for liquidity. Setting aside emergency funds will prevent a cash crunch that would otherwise trigger fire-sale of assets.
Legal
Depending on the jurisdictions and the legal structure of the investment, rights pertaining to custody, ownership and control may have considerable impact to be considered.
Unique Circumstances
Nuances such as environmentally friendly practices, sustainability and Shariah compliance are just some of the screen filters that may be applied. Some may also choose to avoid businesses that involve child labor. Descriptions of unique circumstances that influence choice of investments, are not exhaustive and highly dependent on the investor being advised.
Next up is to know what asset allocation blend to consider in structuring your investment portfolio.
12 Comments
[…] You can called it sorting by asset classes, investment product types or investment categories. They all kind of mean the same thing with the objective of making sense of the investment universe. Besides allocating between them, got to take into consideration their nuances in terms of RRTTLLU (7 considerations for investment products). […]
[…] right? So how does a person set a required rate of return and are there methods to do just that? Returns are such an important consideration out of 7 others. First and foremost, this write up is just but 1 method of setting rate of return expectations. […]
[…] It seems obvious that once you have a view, you ought to express it, but that is not so if you dare not pull the trigger. This is the step where you put your money where your mouth/views are. Simplistically, if you think market is going up, you can’t be shorting the market right? What is the instrument of choice to express your view is another decision point. How familiar are you with the asset classes to structure/tilt your own portfolio? Do you want leverage with it? What is your RDMILT and RRTTLLU? […]
[…] making the decision is quite reckless. But once the necessary considerations and factors (see considerations) have been taken into account, there is a need for boldness to act. Even if the bold decision that […]
[…] I start, please familiarise yourself with categories of investment types, their own characteristic RRTTLLU as well as RDMILT. They need to be integrated into a framework as part of the portfolio management […]
[…] different styles to fit different personalities as well. You can google each to find out more and see if it fits you and the market […]
[…] you noticed 2 iterative flows within the process loop. One iteration involves the client, to employ RRTTLLU and the other involves the dynamic market universe requiring RDMILT to set proper return […]
[…] This is my way of remembering the 7 considerations involved in developing an investment policy statement (IPS) when sitting for the CFA level 3 […]
[…] 7 Considerations for Investment Products […]
[…] 7 Considerations for Investment Products […]
[…] I to VII represent considerations. Generally tax considerations are not impactful across the categories for elaboration. That still leaves 6 x 6 = 36 boxes for explanation. The considerations are lifted from the 7 considerations write up. […]
[…] on to the investor loop, 2 heuristics come to mind instantly, RRTTLLU and RDILMT. (Thou shall not repeat what has already been said. Here’s to show consistency […]