Now, finally the last step and a sample PDF available for download (at no cost, of course).

In the final step, I simply recommend to ask two questions:

1. Does the policy restrict me from selecting a benchmark?

I’ve seen instances in which restrictions around BBB-rated securities caused several headaches to portfolio managers to build portfolios and then measure their performance against a benchmark that they cannot replicate in the first place. Another example would be a market that is highly concentrated such as emerging market debt. If you force diversification parameters, the portfolio would be either impossible to build or would force the asset manager to hold positions she doesn’t like.

2. Is portfolio compliance reasonably easy to test?

Here you have to think about how to operationalize compliance testing. Compliance checks must be automated and run daily by your portfolio manager and your custodian or portfolio system. If your policy guidelines are too convoluted or nuanced, you will spend a lot of time chasing false positives, hoping that there are no false negatives, and explaining to people why the “compliance system doesn’t really work.”

For example, try to avoid rules that require to look through mutual fund holdings, or rules that specify credit ratings “watch” or “outlook” status.

And, as promised, download the sample investment policy.

Scroll down to the bottom of the page and a pop-up window will appear. Enter your email and click download.

If you have trouble downloading the file, send me a message at

Thanks for reading!

Also, just in case, here are links to Part 1 and Part 2 of this series.