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Investment Selection Criteria

Investment Selection Criteria

The investment selection criteria section of your investment policy statement includes your rules for choosing investments. These rules will vary significantly from investor to investor, based on each investor’s investment philosophy. Think of these criteria as a means of quantifying your philosophy.

Things To Know

  • Investment selection criteria are a means of quantifying your philosophy.

To determine what qualities an investment must have before joining your portfolio, consider reviewing some courses on mutual funds and stocks.

Some criteria to consider for mutual funds:

  • Minimum category rating
  • Minimum total return % category rank over various periods
  • Maximum bear-market rank
  • Maximum percentage of assets in top-10 holdings
  • Maximum percentage of assets in any one sector
  • Maximum expense ratio
  • Minimum or maximum asset size
  • Minimum manager tenure
  • Minimum tax-efficiency ratio

Some criteria to consider for stocks:

  • Maximum price for each stock
  • Minimum return on equity
  • Minimum free cash flow
  • Minimum forecasted five-year earnings-growth rate
  • Maximum leverage
  • Minimum dividend yield
  • Minimum market capitalization
  • Maximum price/earnings ratio
  • Minimum revenue growth rate

Any new investment that you’re considering for your portfolio should meet these criteria. If it doesn’t, why not? Do your criteria need to be altered? Or is this an investment that you shouldn’t make given your philosophy?