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Creating an Investment Policy

Mr. Jones is 45 years old and is in good health. He is married, and has two children aged 17 and 18. He and his wife own all shares in a Limited Liability Company that owns a tavern and adjacent restaurant presently valued, based on future cash flow projections, at $5.9 million.

The property around the tavern and restaurant is rapidly developing. Mr. and Mrs. Jones would like to retire to New Mexico after their children have completed four years of college each (paid in full by their parents). The following is a list of assets:

- $5.9 million current present value of the tavern/restaurant
- One joint and several Roth IRA valued at $279,000
- One residential home valued at $475,000 with 5 years left on the mortgage (balance - $120,000)
- Two college savings plans valued at $91,000 and $84,000
- No stocks owned outside of the IRA
- One six month CD valued at $31,000 - renewable
- Cash on hand - $2,500

Formulate and justify an investment policy statement setting forth the appropriate guidelines within which future investment actions should occur. In the statement please be address all relevant objective and constraint considerations.

Solution Preview

Please view the attached file for the investment policy chart.


These are the objectives of Mr. and Mrs. Jones:
1. To finance the 4-year education of each of their two children aged 17 and 18.
2. To be able to retire to New Mexico in 5 years.
3. To make their assets last the rest of their lifetimes.

Investment Philosophy:

The following are Mr. and Mrs. Jones approach to investing:
1. They will balance taking as little risk as they possibly can to achieve a relatively above average long-term rate of return with their ability to tolerate that risk and not panic in an eventuality of a downturn, selling at the wrong time.
2. They recognize that they will never know which asset class will outperform each year, Mr. and Mrs. Jones will diversify across a wide range of investment opportunities. Then they can participate in the upside of most asset-class performance ...

Solution Summary

This solution creates an investment policy based on the Jones' case study by detailing the overall portfolio expected return, loss limit and asset allocation. It also provides the upper limit, lower limit and target percentages for stocks, bonds and cash.