Investment Policy Statement

for the

Dale C. Maley Family

Prepared by: DC Maley

Last Revised 11/28/2009

Executive Summary

Current Assets: Dale has a total of $xxxx in assets and a net worth of $xxxx.

Time Horizon: Dale has 1 – 6 years until retirement and an expected 20 years in retirement
[Life expectancy of 74 years based upon male forefathers]. Dale has a 20 year time
horizon. Connie is 52 years old and if she lives to 90 her life expectancy is another 38 years.
(see Joint Life Expectancy Table at end of this document). Total time horizon is 38 years.

Over-All Portfolio Expected Return: Dale expects a portfolio return that has similar
returns to historical returns (adjusted to the stock-to-bond asset allocation being used)

Historical Rick Ferri

Nominal 30 Year Rick Ferri
Return Prediction 30 Year
1927- with 3% Prediction
Asset Class 2005 Inflation Sigma

Wilshire 5,000 10.01%

Large Cap 8.00% 15.00%
Large Cap Value 12.37%
Large Cap
Growth 9.54%
Small Cap 9.00% 20.00%
Small Cap Value 15.37%
Micro Cap Value 17.28%
Small Cap
Growth 9.22%
Foreign Stocks 10.00% 8.00% 17.00%
Total Bond 5.90% 5.00% 5.30%
REIT 8.00% 14.00%

For example, a 60:40 AA would give 60% (10.01) + 40% (5.90) = 8.4%

Loss Limit: Dale can accept losing 25% in his portfolio in any single year. See Risk
Tolerance chart below.

Asset Allocation: Dale’s target is a 60:40 portfolio counting REIT’s as stock and cash as
bonds.

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Objectives: Dale’s objectives are:
1. To retire in 5 years maximum from ACME Manufacturing (age 59)
2. Retirement income will give same after-tax spending as before retirement. The
withdrawal rate from the investment portfolio will not exceed 4% of assets per year,
inflation adjusted by year.
3. To make assets last the rest of Dale and Connie’s lives.
4. Continue to take one good vacation per year.
5. Start own financial planning business after retirement from ACME Manufacturing.
6. Purchase or rent winter home around Athens, Georgia.

Investment Philosophy: Dale’s approach to investing is:

1. Dale will balance taking as much risk as he possibly can to achieve a higher long-
term rate of return with his ability to tolerate that risk and not panic in a downturn,
selling at the wrong time. Always remember the 38 year time horizon.
2. Dale recognizes he will never know which asset class will outperform each year and
will subsequently diversify across a wide range of investment opportunities. Then he
can participate in the upside of most asset-class performance without over-
concentrating in one area and risking a loss he can not tolerate.
3. Dale will control costs by using low cost index funds or ETF’s for his investments.
He generally believes in the Efficient Market Hypothesis which says that index funds
will outperform active mutual fund managers over long periods of time.

Preferences and Constraints: Dale’s preferences and constraints include:

1. Time Horizon: Dale and Connie have a long time horizon—about 38 years. He can
afford short-term market fluctuations.
2. Asset-Class Preference: Dale believes in the fundamental concept of allocating his
assets over a variety of sub-asset allocation categories. His preference is to include
large-cap U.S. stocks, mid-cap U.S. stocks, small-cap U.S. stocks, real estate in the
form of REIT’s, foreign stocks, bonds, and cash.

The allocation between large, mid, and small-cap stocks should roughly be the same
as the U.S. stock market or 65/25/10 per the Vanguard Portfolio Analysis section on

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 their web site in 2006.

Dale prescribes to the theory that Emerging Market stocks should be included in a
portfolio for diversification and therefore deserve a 20% allocation of the Vanguard
Total International Stock Fund. Per Vanguard’s recommendation, target is that
Foreign Stocks are at least 20% of total stock investments.

Dale believes hard assets also deserve a 5% allocation as a hedge against very high
inflation (Rowe Price New Era fund). Could try PCRIX commodity fund, but do not
have room in retirement account for it, and already own New Era fund.

Dale believes the results of Fama 3-Factor study showing small-cap value should be
over-weighted in the portfolio. However, it may take 20 or 30 years for the small cap
value premium to show up. Swedroe predicts that slice & dice portfolios using small-
cap value will only show a +1% increase in return, versus the 4% historic advantage.
Dale approves adding a value tilt to a portfolio, but has no plans to do this.
3. Performance Expectations: Dale’s goal is to beat inflation by 5 to 8 percent
annually on an over-all basis (basically achieve the 1927-2005 historical returns
shown above)
4. Tax Issues: No special tax issues.
5. Risk Tolerance: Given that Dale has a long time horizon; he is willing to tolerate
short-term market fluctuations of up to 25% in any one year. This risk tolerance will
be reduced as Dale ages. Dale is aware of the risk of having a 60% stock portfolio:
Equity exposure -- Max Loss
20%.....................05%
30%.....................10%
40%.....................15%
50%.....................20%
60%.....................25%
70%.....................30%
80%.....................35%
90%.....................40%
100%....................50%

6. Asset Allocation Limits: Stay within +/- 5% of 60:40

7. Investment Selection Criteria: Dale’s investments must meet the following criteria:
a. No-Load Stock or Bond Index Mutual Funds Index Funds
b. Tax free intermediate municipal bond funds (VWITX) is acceptable if tax
bracket warrants it

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 c. ETF’s if no index funds are available.
d. Foreign stock index funds or ETF’s
e. No limited partnerships, commodity futures contracts, buying on margin, stock
options. No annuities due to high fees. No hedge funds. Pimco PCRIX
commodity fund is acceptable (see Swedroe, Ferri, and Bogleheads). PCRIX is
$25K minimum through Vanguard with 0.75% ER.
f. Immediate annuities may be considered when Dale enters his 70’s. There is
data to suggest that partial annuitization of a portfolio allows a high safe
withdrawal rate due to insurance companies spreading the risk over the whole
population. This allows insurance companies to plan on the average age versus
individual investor planning to maximum age. Note that William Bernstein
recommends not investing in SPIA’s because of insurance company bankruptcy
issues after Crash of 2008 and AIG.

8. Monitoring Procedures: Although Dale will monitor his portfolio on a daily basis,
he will not make any sell decisions more often than annually. At that time, he will
not only review the returns of each of his investments against their peer groups, but
he’ll determine whether these investments are edging him towards his goals.

9. Rebalancing: Rebalancing will be done annually at the end of the year.

Dale C. Maley

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-Page 2 of 11-
This life expectancy table came from book Getting Started in a Financially Secure
Retirement page 106. It originally came from IRS publication 590, but I checked
www.IRS.gov and it is no longer available. 12/13/07

Revision History

Date Revisions
08/05/2006 Added Revision History Page. Revised
evaluation section since not
necessary if using index versus
actively managed funds. Added Fama
comment on small cap growth.
11/26/06 Add header and footer borders. Added
foreign stock allocation and target.
Vanguard portfolio analyzer says my
portfolio is low on foreign stocks (it
does not count BRIC stocks as
foreign stocks).
12/22/06 Made some minor revisions. Removed
Harrahs from list since it was sold.
12/13/07 Performed annual update. Added Lessons
Learned table on poor past
investments as reminder not to pick
individual stocks!
12/18/08 Performed annual update. Stated annual
rebalancing at end of each year.
11/28/09 I added bookmark and fields to automatically
update the number of years of time horizon…versus
retyping many times.
The second way is to use bookmarks. In this
method you would perform the following steps:

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 1. At the first instance of the reference, define
the value or text as a bookmark. (Defining
bookmarks was discussed fully in a previous
WordTips.)
2. At the next point where you need the same
value or text, insert a field by pressing
CTRL+F9.
3. Within the field, type REF [bookmark],
where [bookmark] is the name of the
bookmark you defined in step 1.
4. Repeat steps 2 and 3 for each occurrence of
the value or text.
You will want to make sure that you update your
fields before printing if you use the bookmark
method just described.
I added a macro which updates all fields when the
document is first opened, in case I forget to update
a field.

10/22/2010 Minor updates

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