Not only does having a written policy focus on a board's investment goals, it also provides an objective framework in which investment managers can operate and allows the board of trustees checkpoints for seeing that their policy is being carried out properly. An investment policy should focus on the big picture, stating such things as asset allocation, types of allowable investments rather than specific investments, and other criteria such as standards of investment quality and rate of return objectives. Asset Allocations One of the basic tenets of an investment policy is asset allocation. Asset allocation is simply a decision to expose certain percentages of total Fund assets to segments of the investment markets. In order to achieve higher returns, generally one must be willing to accept higher volatility.
Volatility is one way to measure risk.
Rates of Return To increase one's understanding, one can also look at the actual rates of return and volatility for the past 25 years. This places the spectrum of anticipated investment returns and risk in focus. Most fiduciaries prefer to be some place in between. That point that offers the greatest return with the least amount of risk is called the optimum asset allocation. Many Trustees through common sense have determined how their own portfolios should be structured based on the philosophy that one does not put all his or her eggs in one basket.