a. Acceptable and unacceptable asset classes: In this section of your investment policy, you state which asset classes you will and will not invest in. It is important that you decide which assets you will invest in before you begin investing so that others will not be able to convince you to invest in asset classes that are not suitable for you at your stage in the financial life cycle. Invest where you have a particular expertise or where the odds are in your favor. You should plan to invest in asset classes that have a history of delivering long-term returns, not just high returns over very short periods of time. For example, I recommend that investors invest in stocks, bonds, mutual funds, and cash and cash equivalents; I do not recommend investing in futures, options, foreign currencies, or precious metals. The investments that I have recommended have long-term histories of consistent performance, while the investments that I do not recommend lack a history of consistent performance.

Review the historical performance of various asset classes to roughly estimate future performance. After reviewing the historical performance of the various asset classes, it is likely that you will decide to invest in mutual funds and stocks (large-capitalization, mid-capitalization, and small-capitalization stocks; international markets; and emerging markets), bonds and cash equivalents (short-term, long-term, government, and corporate bonds; money markets; CDs; commercial papers; government papers), and real estate (real estate investment trusts, or REITS, and mutual funds of real estate properties).

Once you have identified which asset classes you will invest in, you must also determine which asset classes you will not invest in. Asset classes on this list may include those in which you do not have expertise or those in which the odds are against you. For example, most investors should probably not invest in asset classes such as foreign currencies. The foreign currency trades are controlled by large international banks, which employ hundreds of very experienced men and women with PhDs in finance; these banks have billions of dollars invested in computers and computing power as well as real-time databases to alert them immediately to economic changes that may affect currencies. The odds are not in your favor: investing in foreign currencies is known as a “zero sum game.” This means that for every winner, there must be a corresponding loser. You do not want to be that loser. Other asset classes that typically require a great deal of expertise include commodities (especially commodity futures contracts which have very high levels of implicit debt), precious metals, and art. Be cautious of investing in these areas unless you have specific expertise to support your investment decisions.