Building an Investment Policy

Why write anything down at all

Decisions made during a market decline or a rally are made under emotional pressure, which research on investor behaviour consistently shows leads to worse outcomes than decisions made calmly in advance.

A written policy is simply a record of what you decided before that pressure existed, so you have something specific to follow instead of reacting in the moment.

Goals, horizon and target allocation

Start with what the money is for and when it will likely be needed. This determines the acceptable target allocation and the range it is allowed to drift within before rebalancing.

State the range, not just a single number — for example, a target with an acceptable band around it — since some drift is normal and does not require action.

What you will own and will not own

A policy can state categories or limits: how large any single holding is allowed to become, whether you use funds, individual companies, or both, and any asset types you have decided to avoid or cap, such as highly speculative assets.

Writing this down in advance removes the need to relitigate it every time a new idea or a hot trend appears.

Contribution plan and review schedule

State how much you plan to contribute and how often, and commit to continuing that plan through both rising and falling markets, since stopping contributions during a decline means buying less when prices are lower.

Set a fixed schedule for reviewing the whole policy — for example, once a year, or when your goals or time horizon genuinely change — rather than reviewing it in reaction to short-term news.

The rules that decide when you sell

The most valuable part of a policy is often the sell rules, because that is where emotion causes the most damage. Rules might include: rebalancing back to target when drift exceeds a stated band, selling if a company's original investment thesis is no longer true, or selling to fund a stated goal.

What a policy should not contain is a rule to sell simply because prices fell or headlines are alarming — that is the exact behaviour a written policy exists to prevent.

Discipline is not refusing to update

Sticking to a plan through ordinary price swings is discipline. Refusing to act when the reason you owned something is no longer true, or when your own life has changed, is not. A policy should say which events are real reasons to review.

Cash needs come first: money needed within a few years for a known expense, or as an emergency reserve, belongs outside volatile holdings, so a decline never forces a sale.

• Scheduled review: a fixed date, such as once a year
• Personal triggers: a new job or loss of income, a move, marriage or divorce, a child, a large expense, or a changed time horizon
• Holding triggers: the written thesis or a stated falsification condition is broken (for example, the business model changed), not just the price
• Plan triggers: drift beyond the stated rebalancing band
• Record every change: the date, what changed, which trigger applied, the evidence, and what you expect — so you can later tell a reasoned update from a reaction