11 Steps To Financial Freedom – Step 9: Create An Investing Policy

After reading an article in a recent MoneySense magazine called 11 Steps To Financial Freedom, I thought it would be interesting to go through each of these steps one-by-one and share my results on this blog.  Each week I’ll go through one of the 11 steps to financial freedom, with the intention of creating a complete financial plan by the end of the series.

Over the past several weeks I have prioritized my goals, determined my net worth, recorded my cash flow, compared my spending to my goals, set my top three goals, developed a strategy to reach our goals, reviewed my insurance coverage, and attempted to slash my taxes.

This week we take a look at step 9: create an investing policy.

What is an Investing Policy?

According to the MoneySense article, every professional financial plan should include an investment policy statement that recommends how your portfolio should be invested.  Having an investment policy statement helps you to stay the course with your investments when the market gets volatile.

Ever since I started my self-directed trading account a few years ago, my investment portfolio has typically been 90% equities and 10% cash and GIC’s.  I’ve never had a formal investing policy, but my time horizon is long and my tolerance for risk is high.

I started off using the Dogs of the TSX approach, where you purchase the 10 stocks in the S&P/TSX 60 with the highest dividend yield, hold them for a year, and then replace them with the new list of 10 high yielding stocks.

I gave up on this approach within a few months when I realized that I didn’t want to turn over my portfolio once a year.  I was researching dividend growth stocks at the time and knew that I wanted to own companies that I could hold for the long-term.

Fortunately, seven of the ten stocks that I purchased were already consistent dividend growers, so I just replaced the three stocks that no longer fit.  Any new money that I’ve added since then has either purchased a new dividend growth stock that fit my criteria, or added to my existing positions.

Action Step #9: Determine which investments are right for you

For this step I needed to fill in “Worksheet 7-How are you currently invested?” and “Worksheet 8-Which investments are right for you?

On Worksheet 7, I listed all of my investments; including cash, fixed-income products and equity holdings.  On Worksheet 8, I determined how much I need to save each month, when I’ll need the money, and what my risk tolerance is.  The results should help me focus in on how I should invest in order to meet my goals.

I currently have about $4,000 in cash and just over $40,000 in stocks, which is in-line with my ideal portfolio mix.  When determining how much I need to save each month, I just needed to revisit step #6: chart a path to your goals.

  1. Transfer $125/month into a high interest savings account for our trip to Ireland
  2. Transfer $500/month into my tax free savings account
  3. Transfer $500/month into my wife’s tax free savings account
  4. Transfer $335/month into my RRSP

I will be saving $125 per month in cash, and $1,335 per month will be invested in dividend growth stocks.  Again, this should keep my portfolio mix close to 90% equities and 10% cash.  I don’t automatically re-invest my dividends, so they will accumulate in a cash account until I’m ready to buy a new stock or add to an existing position.

My Investment Policy Statement

I don’t think this step would be complete without formalizing my investment approach into a written investment policy statement.  This is what I’ve come up with:

To maintain a portfolio consisting of 90% equities and 10% cash, with the equity portion made up entirely of dividend growth stocks.  I will purchase stocks when they are value-priced and hold them for the long term.  Dividends will not be automatically re-invested, they will accumulate in a cash account along with any new money added, until the right buying opportunity comes along.  Individual stocks will not be sold unless the dividend is reduced, the dividend pay-out ratio becomes too high, or the company is no longer focused on growing their dividend.

The expected annual returns for this portfolio are between 6% to 8% per year, with individual stocks maintaining a similar 5-year rate of dividend growth.  The time horizon is 23 years until I reach my goal of retiring at age 55.  I fully expect volatility in this portfolio and I am prepared to withstand losses of up to 20% in any given year. 

Let me know what you think of my investment policy statement.

Next week we’ll write up our will when we go through step 10: create or update your will.

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  1. krantcents on November 16, 2011 at 2:28 pm

    I think I review my asset allocation and investment strategy (policy) annually. I ask myself, does it still make sense?

  2. RC Thompson on November 17, 2011 at 10:15 am

    Thanks for the great advise.
    Always a good refresher. I’m heavy in Real Estate right now. Which I’m comfortable with. My investment advice is to ‘Do the opposite’. Which works out pretty well…so far. 😉

  3. youngandthrifty on November 18, 2011 at 12:54 am

    I like your policy- it keeps things objective and keeps the nasty emotions of panicking away!

  4. TT on November 20, 2011 at 7:39 am

    The one part of this that I hadn’t considered previously and that I think is very wise is to include how much loss you are prepared to handle. Thanks!

  5. Rob on May 30, 2012 at 10:03 am


    Great set of posts. I’m still working on reading through them all (and I realize this post was many months ago) but I’m wondering about your $500 deposits per month to your TFSA. Wouldn’t you blow over your additional $5000 contribution room by the 11th month? (Assuming you’ve maxed out contribution room from previous years.)

    • Echo on May 30, 2012 at 10:52 am

      @Rob – thanks for the comment. I’m including my wife’s $5k annual contribution room in addition to my own, so I’m still within the limits.

  6. jake on September 17, 2012 at 5:15 pm

    Uh one question…what happens if all your investments fall below your 20% drawdown threshold? You don’t have any stoploss? Just curious as I like the rest of your post but not sure what you intend to do if another 2008 crash happens. And also, when do you know the stock is “properly valued”? What metrics you use?

    • Echo on September 18, 2012 at 11:24 am

      @jake – I think the events of 2008 were an extreme outlier and that normal volatility is +/- 20%.

      I’m not a fan of stop-loss because of events like the flash crash where, for a brief moment, stocks lost a ton of value and could have triggered a huge loss.

      As far as properly valued goes, I’ve written about this with a post about how to use a stock screener – https://boomerandecho.com/how-to-use-a-stock-screener-to-find-the-best-stocks/

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