Investment Policy Statement: Campbell Family

The Investment Policy Statement (IPS) is tailored for Mr. and Mrs. Campbell, an American couple living in Portugal with a three-year-old son. Thomas runs his own physiotherapy clinic while Emma practices ophthalmology at a renowned private hospital. They have accumulated USD 190,000 in savings and aim to invest these funds to ensure their son can freely choose an educational program at his discretion in the future. To accomplish their objective of achieving USD 558.482,72 in real terms within a 15-year timeframe, the investment plan must generate an annual real rate of return of 9.10%. Thomas and Emma’s preference is to invest exclusively in US Stock Exchanges using USD. Moreover, they want to limit their investments to large and mega-cap companies, and no leverage nor short-selling strategies are considered. The Strategic Asset Allocation (SAA) should follow a conservative approach with a larger proportion of bonds relative to equity, therefore the advisor decides to assign 76.43% of their portfolio to U.S. T-Notes/U.S. money market securities and allocate the remaining 23.57% to U.S. equities. Considering financial characteristics such as job security, liquidity requirements, and tax status, along with the family’s relatively youthful age and risk-aversion levels, the investment philosophy followed in this IPS is a value investing philosophy. The advisor implements strict screens for the security selection phase and then relies on Modern Portfolio Theory (MPT) to determine the expected return and volatility of the optimal portfolio. The portfolio is constituted of 15 stocks and its expected return is exactly 9.10% with a volatility of 1.36% and a Sharpe ratio of 3.56. Several risk mitigation strategies are implemented throughout the IPS, namely the application of Roy’s Safety-First criterion and the application of Historical VaR and Monte Carlo VaR.