Course 108: Creating Your Investment Policy Statement
Investment Selection Criteria
In this course
1 Introduction
2 Executive Summary
3 Investment Objectives
4 Investment Philosophy
5 Investment Selection Criteria
6 Monitoring Procedures
7 Revisiting Your IPS

The Investment Selection Criteria section of your Investment Policy Statement includes your rules for choosing investments. These rules will vary significantly from investor to investor, based on each investor's Investment Philosophy. Think of these criteria as a means of quantifying your philosophy.

To determine what qualities an investment must have before joining your portfolio, consider reviewing some of the classes in the Mutual Funds and Stocks tracks of the Investing Classroom.

Some criteria to consider for mutual funds:

  • Minimum category rating
  • Minimum total return % category rank over various periods
  • Maximum bear-market rank
  • Maximum percentage of assets in top-10 holdings
  • Maximum percentage of assets in any one sector
  • Maximum expense ratio
  • Minimum or maximum asset size
  • Minimum manager tenure
  • Minimum tax-efficiency ratio
Some criteria to consider for stocks:

  • Maximum price for each stock
  • Minimum return on equity
  • Minimum free cash flow
  • Minimum forecasted five-year earnings-growth rate
  • Maximum leverage
  • Minimum dividend yield
  • Minimum market capitalization
  • Maximum price/earnings ratio
  • Minimum revenue growth rate
Any new investment that you're considering for your portfolio should meet these criteria. If it doesn't, why not? Do your criteria need to be altered? Or is this an investment that you shouldn't make given your philosophy?

Next: Monitoring Procedures >>


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