Have you Established your Investment Policy?

Like any investor, if you want to manage your portfolio yourself, you must first establish your investment policy. This will give you clear guidelines to follow for your portfolio and will enable you to make better investment decisions. There are four important rules to keep in mind when you put together an investment policy.

The first rule is called diversification. It basically means holding stocks in different economic sectors. This enables you to reduce your portfolio’s non-systematic risk. This principle is based on the theory that when a stock goes down in a diversified portfolio, it will be offset by the gains of the other stocks. That said, diversification can’t eliminate what’s called systematic risk, which is always present in the market. Among other things, systematic risk is linked with inflation, economic cycles and rising interest rates.

The second rule is very important and is called asset allocation. It must be carefully developed and adapted to your needs and your investor profile.

There are four main categories of assets: cash, fixed-income securities, stocks and high-risk assets.

It’s here that you have to determine how you plan on distributing your assets. That is, you have to decide the percentage of each asset class you want in your portfolio, as well as the percentage of each asset in relation to your portfolio as a whole.

The third rule aims to define entry and exit price levels. For every stock you’re interested in, you first have to establish very specific and realistic forecasts: the price you’re prepared to pay, its target value, and how long you’re planning to hold on to it. But always remember that you’ll have to periodically review your criteria as markets evolve and as economic trends unfold.

Finally, you have to make sure you don’t develop an emotional attachment toward a particular stock. Just because you love a company’s products doesn’t mean you should blindly purchase some of their stock. A thorough analysis is required.

In short, it doesn’t matter what stock you’re buying. It’s critical that you always do your homework on the company and establish a sound investment policy. This way, you’ll be in a better position to make decisions that suit your needs.


Once you’ve determined your investment policy, it’s time to track and evaluate your portfolio. The global economic situation makes it crucial that every investor keep close tabs on economic news and the performance of their portfolio. We’re continually inundated with economic and financial news, reports on inflation, the unemployment rate, the debt, the exchange rate and so on, but staying on top of these things will help you make adjustments to your portfolio as needed.

The best way to evaluate a portfolio’s performance is to compare it to another portfolio that carries similar risk. But since they’re not always easy to get a hold of, another method consists in comparing your returns with those of the stock market indexes: For example, the S&P/TSX 60 for your Canadian stocks, and the Dow Jones or the S&P 500 for your American stocks. This method, though less precise, still gives you some interesting comparables.

It’s easy to compare returns with people that are close to you. Just remember that comparing returns without taking into consideration the mix of stocks in each portfolio, the risk of each stock, and the profile of each investor is like comparing apples with oranges.

What’s more, evaluating each stock in your portfolio will allow you to determine whether its performance is in line with both your expectations and your investment policy. Comparing the performance of one stock to stocks of other companies that operate in the same sector can also give you a good idea of what its return is.

Always keep an eye on stock markets and the world economy. They’re constantly shifting, and more often than not, have repercussions on the stocks in your portfolio. Staying up to date will help you make better decisions and will go a long way toward avoiding headaches down the line.

The author

Marc Desnoyers

Marc Desnoyers

B.Sc., M.B.A., C.F.A