# Rules made in calm weather: a one-page investment policy > Goal, horizon, mix, monthly amount, rebalancing rule, what to do in a fall and a small capped play bucket. - Course: [Long-Term Investing: Index Funds, Risk and Your Own Behavior](https://productovi.com/courses/long-term-investing.md) - Module: The users are the risk (and so are we) - Lesson 27/32, ~22 min - Source: https://productovi.com/courses/long-term-investing/investment-policy ## Decide before the storm **Alex Tutor:** Late September at Zapas. The behavior numbers convinced Ethan, and your team, with you as the PM, gets two weeks to build a "My plan" screen before launch. **Grace:** Here's the idea. In a fall, people make decisions with their stomach. So we ask them to make the decisions earlier, on a calm day, and write them down. **Ethan:** A whole policy document? Our users won't read three pages. **Grace:** One screen. Seven lines: goal, horizon, mix, monthly amount, rebalancing rule, what I do in a fall, and how big a play bucket can be. Each line answers one question the user would otherwise answer in a panic. ![A one-page plan with seven lines: goal, horizon, mix, monthly amount, rebalancing, what to do in a fall, and a play bucket capped at a share the user sets, say 3–10%.](https://productovi.com/courses/long-term-investing/diagrams/m7-l3-my-plan.png) **Sofia:** Let me try it on an example user: someone saving 200 dol. a month for a home deposit in ten years. > **Exercise:** Match each line of the "My plan" screen to the question it settles in advance. **Grace:** Good. Ten years is long enough for stocks to carry most of it, so let's say Balanced, 60/40. 200 dol. on the 5th, automatic. Rebalance only when stocks drift 5 points or more. **Sofia:** That's four lines already, and none of them took more than a minute. **Grace:** The easy lines are easy because nothing is happening. The next one is written for the evening the app shows −20%. ## What I do in a fall **Grace:** The most important line is "in a fall". It's also where people write the vaguest things. "I'll stay calm" is a wish, not a rule. **Sofia:** So the rule has to say what I do, with a number in it? **Grace:** Yes. A trigger, an action and a date to review. Something your scared self can follow without thinking. > **Exercise:** Which version of the "In a fall" line will actually help a user in a 30% drop? ## Automate the boring parts **Grace:** Then automate what can be automated. The monthly deposit runs by itself. Rebalancing runs by a band, not by mood. **Ethan:** Doesn't a band rule trade too often? **Grace:** The opposite. In our 40-year history a 60/40 mix with a 5-point band rebalanced 10 times, against 39 times with a yearly rule, and ended with about the same: 20,173 against 19,960 dol. from 1,000. > **Exercise:** **True or false:** in Zapas's synthetic 40-year history, a 60/40 mix rebalanced only when stocks drifted 5 points from 60% needed far fewer trades than yearly rebalancing and kept the same worst fall. ## A fence for the play money **Sofia:** And the play bucket? Some users really want Robo Theme. **Grace:** Fine, with a fence: a cap the user chooses, say somewhere in 3–10% of the plan. Look what the cap does: in the beta the theme lost 43% from month 4. At 3% of a portfolio that's a 1.29% hit, at 10% a 4.3% hit, at 30% a 12.9% hit. **How much the theme's 43% fall cost the whole portfolio, by the size of the play bucket (synthetic)** | Play bucket, % of the portfolio | Loss on the whole portfolio, % | | --- | --- | | 3 | 1.29 | | 5 | 2.15 | | 8 | 3.44 | | 10 | 4.3 | | 30 | 12.9 | | 100 | 43 | *Loss from the play bucket alone = bucket share × 43.0% (Robo Theme, start of month 4 to year end).* > **Exercise:** A user has **10,000 dol.** on Zapas and has set the play bucket cap at **8%**, all in Robo Theme. From the start of month 4 to the year end the theme loses **43.0%**. How many dollars does the play bucket lose? ## When the plan should change **Ethan:** So once written, the plan never changes? **Grace:** It changes when your life changes, not when the market does. A new job, a child, a goal moved closer: review it. A 25% fall: follow it. **Sofia:** And who decides what counts as a life change? The user or us? **Grace:** The user, always. We only ask the right questions once a year and make the review easy. Our job is the default, not the decision. > **Exercise:** Which of these are good reasons to rewrite a user's plan? Select all that apply. **Sofia:** Is there a right order to fill it in? **Grace:** Yes, each line depends on the one above it. You can't pick a mix before you know the horizon. > **Exercise:** Put the steps of filling in "My plan" in the order where each one depends on the ones before it. ## Your turn: the default fall line **Ethan:** Most users won't write their own fall line. What do we pre-fill? **Alex Tutor:** Write the default users will see and can edit. It should pass Grace's test: a trigger, actions, a review date. > **Exercise:** Write the default text Zapas pre-fills in the "In a fall" line of "My plan" (2–4 sentences), plus one sentence for the play bucket. Include a trigger, concrete actions, a review date and a cap. > **Key ideas** > > - An **investment policy** is one page written on a calm day: goal, horizon, mix, monthly amount, rebalancing rule, what I do in a fall, play bucket. > - The fall line needs a trigger, actions and a review date; feelings are not rules. > - Automate the routine: monthly deposits, and rebalancing by a band (10 trades in 40 years vs 39 yearly, same −22.8% worst fall). > - A play bucket with a cap you set, say 3–10%, keeps a bad bet survivable: a 43% theme fall costs 1.29% of the portfolio at 3% and 4.3% at 10%. > - Change the plan when life changes, not when prices do. > **Educational, not advice** > > This lesson explains how investing works; it doesn't tell you what to buy. Investments can fall, and you can get back less than you put in. All Zapas and Tessaro data is synthetic. Check the current rules where you live or ask a licensed professional. **Alex Tutor:** Next time: the case. In the spring drop Zapas tested a "pause before selling" screen. Was it a win? - Previous lesson: [Losses hurt twice: checking, herding, chasing and bubbles](https://productovi.com/courses/long-term-investing/losses-hurt-twice.md) - Next lesson: [Case: a beta cohort panic-sold](https://productovi.com/courses/long-term-investing/case-panic-cohort.md) --- Productovi Learning. Free, no sign-up needed to read.