Most families invest without a written investment policy. Decisions get made, capital gets allocated, and if asked to explain the reasoning, the family points at a portfolio. The portfolio is the output. The policy is the reasoning, and without it there is no way to tell a good decision from a lucky one.
Purpose before percentages
A policy begins with obligations. What does this capital have to pay for, and when? Family spending, taxes on death, a commitment to a foundation, support for a member who cannot work, a buy-out of a sibling’s shares in nine years. Each obligation has a date and a degree of certainty, and together they define the horizon.
Families who do this work find the conversation changes character. Risk becomes a question of whether the money will be there when it is needed.
Count everything
A frequent error in family portfolios is counting only the liquid part. A family whose principal asset is an operating business in one industry, whose real estate sits in the same city, and whose portfolio is then invested for growth is more concentrated than its statements show.
A policy should state the whole exposure—including assets no adviser manages—and set the liquid portfolio’s role in relation to it. Often that role is to supply stability and liquidity.
Define risk in terms the family recognizes
Volatility is a convenient measure and a poor description of what families fear. More useful formulations are concrete: the largest peak-to-trough decline the family would tolerate without changing course; the number of years of spending held in cash and low-risk assets; the outcome the family would regard as unacceptable.
Write those down. In a bad quarter, a policy that records what the family agreed to endure is what keeps the plan in place.
Say who decides
A policy should name the decision-making process: who can rebalance, who must be consulted before a material change, what triggers a review, and how disagreements are settled. In multi-generational families this section often matters most.
State the constraints and the costs
Constraints belong in writing: positions that cannot be sold for tax or sentimental reasons, minimum liquidity, prohibited exposures, values-based exclusions, currency requirements for family members abroad. So do costs—management fees, embedded product costs, trading and custody—totalled in one number the family can weigh against what it is receiving.
Then review it on purpose
A policy should be revised deliberately and infrequently. Annual review is usually right, with an out-of-cycle review triggered by family events: a liquidity event, a death, a marriage, a material change in the operating business.
The discipline is to change the policy when the family’s circumstances change. A market decline that makes the policy uncomfortable is, by itself, no reason to revise it.