Writing Your Personal Investment Constitution

First published 26 Aug 2026 · Last verified 29 Aug 2026

A constitution, in the sense that matters to a country, is a short document that binds people to their own better judgment. It exists because a nation knows that in the heat of a crisis — a war, a riot, a panic — the people in power will be tempted to do something rash, something that feels right in the moment but is wrong for the long run. So the constitution is written in advance, in a calm hour, and it ties the hands of the future self who will not be calm.

Your money needs the same thing.

This chapter teaches you to write a personal investment constitution: a short, plain document, written by you, for you, that states your goals, your real tolerance for risk, your target asset allocation, your rules for how big any single position can be, and the exact conditions under which you will buy, hold, or sell. It is not a legal document. No court enforces it. NRB (Nepal Rastra Bank, the central bank that regulates banks and the financial system) will never ask to see it, and SEBON (the Securities Board of Nepal, which regulates the stock market and brokers) has no form for it. The only enforcement mechanism is you — reading it back to yourself at the exact moment you are most tempted to break it.

That is also why it works.

Lesson 95.1 — Why an Unwritten Plan Is Not a Plan

Ask most NEPSE (Nepal Stock Exchange) investors what their strategy is, and you will get an answer that sounds like a plan but is not one. "I invest for the long term." "I don't panic during corrections." "I only buy good companies." These are values, not rules. A value tells you what kind of person you want to be. A rule tells you exactly what to do at 11 a.m. on a Tuesday when the index has dropped 6 percent in three sessions and your broker's TMS (Trading Management System, the online platform brokers give clients to place buy and sell orders) app is lighting up with red numbers.

The gap between a value and a rule is where money gets lost.

Here is the uncomfortable truth this book has been building toward since the chapters on behaviour: the person who sets your investment strategy on a calm Saturday afternoon, thinking clearly with a cup of tea, and the person who actually executes trades on a chaotic Tuesday during a crash, are not fully the same person. Fear and euphoria are not just feelings that sit alongside your reasoning. They change the reasoning itself. Chapter 90 walked through exactly this: how the same investor who says "I would never sell at the bottom" sells at the bottom anyway, and how the same investor who says "I would never chase a rally" ends up buying an overheated stock at its peak because everyone else is doing it and the fear of missing out has quietly replaced the fear of loss as the dominant emotion in the room.

A written constitution is what behavioural economists call a commitment device. A commitment device is any tool you set up in advance to bind your future behaviour, precisely because you don't trust your future self to make the same decision your calm, current self would make. Odysseus tying himself to the mast so he could hear the sirens' song without steering his ship onto the rocks is the oldest example in Western literature. A Nepali equivalent that many households already understand instinctively: a dhukuti or a bank fixed deposit that locks money away for a fixed term precisely so that a moment of temptation — a wedding, a new phone, a friend's business scheme — cannot touch it. You already believe in commitment devices. This chapter asks you to build one for your stock portfolio.

Why does writing it down matter so much, rather than just "knowing it in your head"? Three reasons.

First, memory is unreliable under stress. Psychologists have shown repeatedly that people recall their own prior intentions selectively when under emotional pressure — they remember the parts that justify what they want to do right now, and conveniently forget the parts that don't. If your plan lives only in your head, a crash will edit it for you without your permission. A plan on paper (or saved as a note on your phone) cannot be silently edited. It sits there, unchanged, saying the same thing it said in March that it says in August.

Second, writing forces precision. "I will hold for the long term" feels like a complete thought until you try to write down what "long term" means in months or years, and what would make you break that hold. Most investors discover, in the act of writing, that they had never actually decided several of the things they assumed they had decided. The blank page exposes the gaps.

Third, a written document can be reviewed by someone else — a spouse, a trusted friend, even a note to your future self — which adds a small layer of social accountability. Telling your spouse "I have a rule that I never put more than 10 percent of my portfolio into one stock" is a very different commitment than merely believing it privately, because now breaking it means either hiding it from someone or explaining yourself.

None of this means a constitution is inflexible forever. Life changes — a marriage, a child, a job loss, an inheritance, a house purchase — and the document should change with it. But it should change on a calm day, through a deliberate re-write, not through a quiet unspoken drift during a bull run or a panicked scramble during a crash. Chapter 96 will cover exactly how and when you are allowed to override your own rules. This chapter is about writing the rules in the first place.

Lesson 95.2 — The Anatomy of a Constitution: The Sections You Need

A national constitution typically has a preamble, a statement of rights, a structure of institutions, and amendment procedures. Your personal investment constitution is much shorter, but it has an equivalent structure. Seven sections cover everything you need. You do not need to write pages under each — a paragraph or a short list is enough for most sections. What matters is that every section actually gets answered, not skipped.

The seven sections are:

One — Purpose and goals. What is this money for, and when do you need it?

Two — Risk tolerance, stated honestly. How much can this portfolio fall in value before you would do something regrettable?

Three — Asset allocation targets. What percentage goes into NEPSE equities, what percentage into fixed deposits or government bonds, what percentage into gold, what percentage stays in cash?

Four — Position-sizing rules. How big can any single stock or sector be, as a share of the total portfolio?

Five — Buy rules. What has to be true about a company, and about the market, before you will buy?

Six — Hold and sell rules. What specific event triggers a sale — and just as importantly, what does not?

Seven — Review and amendment procedure. When and how are you allowed to revisit this document?

Let us take these one at a time, slowly, because each one is a discipline in itself.

Purpose and goals deserves more care than most investors give it, because different goals justify completely different strategies, and confusing them is one of the most common causes of bad decisions. Money you will need in eighteen months for your daughter's college admission fee behaves like a different animal from money you are setting aside for retirement in twenty-five years, even though both might currently sit in the same demat account. The eighteen-month money should never have been in volatile growth stocks in the first place; if it was, the "sell rule" that saves you is really a "should not have bought" rule that came a year too late.

Nepali households often mix these goals inside one mental bucket — "market ko paisa," money in the market — without separating what portion is truly long-term wealth-building and what portion is actually short-term savings that got parked in equities because a fixed deposit's interest rate looked unexciting. Your constitution should force the separation. List each goal, its target date, and the amount of money attached to it, even roughly. A goal like "buy a small flat in Kathmandu, target 2033" behaves completely differently in your allocation decisions than "retirement income starting 2050."

Risk tolerance is the section investors lie to themselves in most. Everyone believes, in a calm month, that they can tolerate a 30 percent portfolio decline "because it's long term." Very few people discover this is true only after they have actually lived through a 30 percent decline and did not sell. The honest way to write this section is retrospective and specific: recall the worst drawdown (a drawdown is the percentage decline from a portfolio's peak value to its subsequent lowest point before it recovers) you have actually lived through, and write down exactly what you did and how you felt. If you have never lived through a real NEPSE correction, borrow from history — the 2021-2022 correction, when the index fell by roughly 40 percent from its peak, is a fair benchmark to imagine yourself inside of, position by position, rather than as an abstract percentage.

Asset allocation and position sizing get their own full lessons below, so we will hold those for now. Buy, hold, and sell rules likewise get a dedicated lesson. Review and amendment procedure is short but crucial: state plainly that the document is reviewed on a fixed calendar schedule — once a year is typical, perhaps aligned with a birthday, with Nepali New Year, or with the start of a fiscal year — and that no revision happens during a period of sharp market movement, up or down. We will return to this idea, because it is the hinge on which the whole document depends: a constitution that can be casually rewritten in a panic is not a constitution at all.

Lesson 95.3 — Setting Goals, Time Horizons, and Risk Tolerance in Writing

Let's slow down on the two sections that most investors get wrong: time horizon and risk tolerance, and how they interact.

A time horizon is simply how long you can leave money invested before you are likely to need it back in cash. This single number does more to determine your correct strategy than almost anything else in this book. Money with a horizon under two or three years has no business in NEPSE equities at all, no matter how confident you feel, because equities can and do stay down for years at a stretch, and you cannot control when your college fee, wedding expense, or medical bill arrives. Money with a horizon of ten, fifteen, twenty years can absorb far more volatility, because time itself becomes a kind of insurance — a bad five-year stretch has historically been followed, in most markets including NEPSE over its multi-decade history, by a recovery, given enough runway for it to happen.

The mistake to guard against is treating "long term" as a slogan rather than a date. Write an actual year next to every goal. "Retirement" is not a horizon; "2048" is. Once you have real years attached to real goals, the correct allocation for each pool of money becomes far more obvious, almost mechanical, rather than a matter of feeling brave or cautious on a given day.

Risk tolerance has two components that are often confused: risk capacity and risk appetite. Risk capacity is a financial fact about your life — how much can you actually afford to lose without derailing your real goals, given your income, your dependents, your debts, and how replaceable that money is. A 28-year-old government employee with a stable pension, no dependents yet, and rent-only expenses has high risk capacity even if she feels nervous about volatility. A 55-year-old sole earner supporting elderly parents and two children in college has low risk capacity, no matter how bold he feels when NEPSE is rallying. Risk appetite, by contrast, is a psychological fact — how much anxiety you can tolerate seeing your account balance fall, independent of whether you can technically afford the loss.

Your constitution should state both honestly, because your allocation should be governed by whichever one is lower. A high risk capacity paired with low risk appetite means you can afford to be aggressive but you will not sleep at night if you are, and the sleepless investor makes the exact panicked decisions this whole chapter is designed to prevent. It is entirely rational, not weak, to choose a gentler allocation than your finances alone would technically permit, if that gentler allocation is the one you can actually sit through without breaking your own rules.

A practical way to write the risk tolerance section is to complete two sentences honestly: "If my portfolio fell by [X] percent, I would feel [describe the feeling] and I would be tempted to [describe the action]." Then write a second sentence: "The maximum decline I am willing to commit, in writing, to sit through without selling is [Y] percent." For most investors with a genuinely long horizon and a diversified portfolio, Y ends up somewhere between 25 and 40 percent, because history shows corrections of that size do happen and do recover, given years of patience. Writing this number down before it happens, rather than discovering it while it is happening, is the entire point of this lesson.

Remittances deserve a specific mention here, because they change the shape of risk tolerance for a large share of Nepali households. If part of your investable savings comes from a family member working abroad — in the Gulf, in Malaysia, in Korea, in Australia — that income stream itself carries its own risk: job contracts end, exchange rates move, and a household's monthly cash flow can change with little notice. If your investing goals depend on remittance income continuing at its current level, your risk tolerance section should explicitly note this dependency, because it means your capacity to absorb an equity market downturn while also needing to draw cash from savings is lower than a household whose income is fully independent of the portfolio.

Lesson 95.4 — Asset Allocation Targets and Position-Sizing Rules

Asset allocation is the decision of how to divide your total investable money among broad categories — NEPSE equities, fixed deposits or government bonds and debentures, gold, and cash or cash-equivalents held for emergencies and near-term needs. Decades of research on investment outcomes, across many countries and markets, point to the same uncomfortable conclusion: this single decision — the mix between categories — explains far more of an investor's long-run results than which individual stocks were picked within the equity portion. Most investors spend 95 percent of their attention picking stocks and 5 percent thinking about allocation. The evidence says the ratio of attention should be closer to reversed.

Your constitution should state target percentages for each category, along with acceptable bands around each target — because markets move, and a target that must be hit exactly every single day is unworkable. For example: "Equities: target 55 percent, acceptable range 45 to 65 percent. Fixed deposits and government bonds: target 30 percent, range 20 to 40 percent. Gold: target 10 percent, range 5 to 15 percent. Cash and emergency reserve: target 5 percent, range 3 to 10 percent." When your actual holdings drift outside the stated range — because equities rallied hard and now make up 70 percent of the portfolio, say — that drift itself becomes the trigger for a specific, pre-agreed action: rebalancing, meaning selling a slice of the category that has grown too large and buying more of the category that has shrunk too small, to bring the mix back within its stated band.

This is worth pausing on, because it is one of the most powerful and least emotional rules an investor can pre-commit to. Rebalancing, done according to a fixed rule rather than a feeling, forces you to systematically sell portions of whatever has recently done well and buy portions of whatever has recently lagged. That is the literal definition of buying low and selling high, executed automatically, without requiring you to correctly predict anything about the future. It feels uncomfortable every single time you do it — you are always selling the thing that "everyone" is excited about and buying the thing that looks unloved — and that discomfort is exactly the evidence that it is working as intended rather than following the crowd.

These bands are illustrative starting points, not a universal prescription — your actual figures should reflect the goals and horizons and risk tolerance you wrote in the earlier sections, and should be sense-checked against your own specific life. A retired person drawing income from the portfolio needs a materially different mix from a 25-year-old in her first job. The point of the table is to show you the shape of a written allocation section, not to hand you a single correct number.

Position-sizing rules answer a narrower but equally important question: within your equity allocation, how much can go into any one company, or any one sector? This is the discipline that protects you from concentration risk — the danger of having so much money in a single stock, or a single industry like banking or hydropower, that one company's bad news or one sector's regulatory shock can meaningfully damage your entire net worth.

A simple, workable position-sizing rule for most retail investors looks like this: no single stock may exceed 10 to 15 percent of total equity holdings at the time of purchase; no single sector — banks, hydropower, insurance, microfinance, hotels, manufacturing — may exceed 30 to 35 percent of total equity holdings at the time of purchase. Note the phrase "at the time of purchase." A stock you bought at 10 percent that later rallies to 20 percent of your portfolio through no additional buying on your part is not automatically a rule violation; it is a signal to consider rebalancing, per the rule above, not a sign you did something wrong when you bought it.

A related rule many Nepali investors need to write explicitly, given how the market actually operates, concerns IPO and FPO allotments (an IPO, or Initial Public Offering, is a company's first sale of shares to the public; an FPO, or Further Public Offering, is a subsequent sale by an already-listed company) and bonus shares (additional free shares issued to existing shareholders, funded from a company's reserves, which increases the number of shares you hold without you paying anything extra, though it does not by itself increase the total value of your holding). Because IPO allotments are partly a matter of lottery-style allocation through the ASBA system and bonus shares arrive without a purchase decision, your position-sizing rule should explicitly say what happens when a "windfall" of shares — a large bonus issue in a stock you already hold heavily, for instance — pushes you over your size limit without any active buying on your part. The honest answer, in most cases, is the same as the rebalancing rule: trim back down to your target band rather than treating a lucky allotment as an exception to the rule you wrote for yourself.

Lesson 95.5 — Buy, Hold, and Sell Rules: Writing Your Own Circuit Breakers

NEPSE itself uses circuit breakers — rules that automatically halt trading, market-wide, when the index moves too far too fast in a single session, giving everyone a forced pause to think rather than react. Your constitution needs the same mechanism, built for you personally, because no exchange-wide circuit breaker will save you from your own decision to sell a fundamentally sound holding in a panic, or to buy a wildly overpriced one in a mania.

Start with buy rules. A buy rule is a checklist a company must pass before you are permitted to purchase its shares, regardless of how exciting the tip, the rumour, or the chart pattern looks. A workable checklist, built from the fundamentals-and-valuation lessons covered earlier in this book, might include items such as: the company has published at least three years of audited financial statements you have actually read; you understand, in one sentence, how the company makes money; the price you are paying implies a valuation you can justify against the company's earnings or book value, not merely against where the stock traded last week; the purchase, if made, would not breach your position-sizing limits from Lesson 95.4; and you are not buying because the stock has already risen sharply in the past few days and you fear missing further gains.

That final item deserves its own emphasis, because it is the single most common rule violation among first-time NEPSE investors. Buying because a stock "is moving" — because friends, a Facebook group, or a Viber investment channel are talking about a stock's rapid rise — is buying on momentum and social proof rather than on the checklist. It is not automatically wrong to ever buy a rising stock, but your constitution should require that you can still answer the fundamental questions on your checklist independently of the price action, before you buy anything that is already "hot."

Hold rules are, in a sense, the default: absent a specific sell trigger, the rule is to keep holding. Investors underestimate how much discipline this requires, because doing nothing, while everyone around you is doing something, feels like negligence even when it is actually the correct choice. Your constitution should explicitly permit — even instruct — long stretches of inaction. Write a sentence like: "Absent one of the sell triggers listed below, I will not sell a holding merely because its price has fallen, merely because a friend or a media commentator expresses doubt about it, or merely because I feel bored or restless and want to 'do something' with my portfolio."

Sell rules are where the real work of this lesson lives, because "sell" decisions are where panic and euphoria do their most expensive damage. A good sell rule distinguishes clearly between reasons that justify a sale and reasons that do not, and it is written specifically enough that you cannot argue your way around it in the moment.

Reasons that typically do justify a sale, written into a constitution in advance: the original investment thesis has been proven wrong by new, verified information — for example, the company's fundamentals have genuinely deteriorated, not merely its stock price; the holding has grown, through price appreciation, to exceed your position-sizing limit, and a partial trim brings it back in line; you have identified a goal-driven need for the cash itself, tied to a date you wrote in your purpose and goals section; or a full annual review, conducted on your fixed calendar date, concludes the holding no longer fits your allocation targets.

Reasons that do not justify a sale, and should be written down explicitly as such, precisely because they are the reasons investors act on anyway: the overall market index has fallen sharply over a few days or weeks with no company-specific bad news; a news article or social media post predicts further declines; the stock has "already gone up a lot" and you fear giving back gains, absent any actual deterioration in the business; or you simply feel anxious. Anxiety is real and worth respecting, but the constitution's whole purpose is to have decided, in a calmer hour, that anxiety alone is not sufficient grounds to act, and to have a specific alternative response ready — such as re-reading the constitution itself, or waiting a mandatory 72 hours before placing any sell order triggered by a feeling rather than a listed rule.

Building genuine circuit breakers into your own behaviour, as this table shows, is mostly a matter of pre-deciding which category a future event will fall into, so that when it actually happens you are merely checking a box rather than debating with yourself under stress.

Lesson 95.6 — A Worked Example: One Investor's Full Constitution

Theory is easiest to absorb through a complete example. Meet our fictional narrator for this lesson: Sunita Adhikari, a 32-year-old schoolteacher in Pokhara. She has been investing in NEPSE for four years, started with a small inheritance and a habit of saving from her monthly salary, and has just finished reading Chapters 90 through 95 of this book. She sits down on a quiet Saturday and writes the following document. It is not perfect, and it is not meant to be copied word for word — it is meant to show you the shape, the tone, and the level of specificity a real constitution should have.

Sunita Adhikari's Investment Constitution — Written Baisakh 2082, to be reviewed every Baisakh thereafter.

Section One, Purpose and Goals. This portfolio serves three goals. Goal A: an emergency reserve, already held separately in a savings account and fixed deposit, not part of this equity strategy. Goal B: a house down payment, targeted for 2032, current estimated need four to five lakh rupees beyond what fixed deposits alone will provide. Goal C: retirement supplement, no fixed date, expected drawdown beginning around 2055. Only money genuinely available for a horizon of seven years or more, after Goals A and the near-term portion of Goal B are separately funded, belongs in the equity portion of this constitution.

Section Two, Risk Tolerance. I lived through the 2021-2022 correction with roughly sixty percent of my current portfolio invested. My portfolio fell by about 35 percent at its worst point. I did not sell, though I felt anxious for several months and stopped checking my TMS app for weeks at a time as a coping method. Based on that experience, I state honestly: I can sit through a decline of up to 35 to 40 percent without selling, provided no single company-specific bad news justifies otherwise. Beyond that range, I acknowledge my judgment may weaken, and I rely on the rules below, not on my feelings in the moment, to guide my actions.

Section Three, Asset Allocation Targets. Equities: target 50 percent of investable savings (excluding Goal A's emergency reserve), acceptable range 40 to 60 percent. Fixed deposits and government bonds: target 35 percent, range 25 to 45 percent. Gold, held as jewelry-equivalent value or gold-backed savings: target 10 percent, range 5 to 15 percent. Cash held within the investment account for opportunities and near-term Goal B needs: target 5 percent, range 3 to 8 percent.

Section Four, Position-Sizing Rules. No single company shall exceed 12 percent of my total equity holdings at time of purchase. No single sector shall exceed 30 percent of my total equity holdings at time of purchase. If a holding exceeds these limits due to price appreciation or a bonus share issue, I will trim it back to target at the next quarterly review, regardless of how strong the story appears at that time.

Section Five, Buy Rules. I will only purchase a company's shares if all of the following are true: I have read its most recent audited annual report; I can state in one sentence how it earns revenue; its price-to-earnings ratio, or an equivalent valuation measure appropriate to its sector such as price-to-book for banks, is not obviously higher than its own five-year average or its closest listed peers without a clearly stated reason I can write down; the purchase does not breach my position-sizing rules above; and I am not buying primarily because the price has risen sharply in the past thirty days.

Section Six, Hold and Sell Rules. My default action, absent a trigger below, is to hold. I will sell, in whole or in part, only when: verified company fundamentals deteriorate in a way that breaks my original reason for buying; a holding exceeds my position-size limit; I have a dated, written cash need from Goal B or Goal C that this money is required for; or my scheduled annual review in Baisakh concludes a rebalancing is needed. I will not sell because the NEPSE index has fallen broadly with no company-specific news, because of a rumour or a Viber group's panic, or because a stock has "already run up" without a change in its fundamentals. Any sale not covered by these listed triggers requires a mandatory 72-hour waiting period from the moment I first feel the urge to sell.

Section Seven, Review and Amendment. This constitution is reviewed once per year, in the month of Baisakh, on a day chosen when the market has been calm for at least the preceding two weeks. No amendment to this document may be made during a period when NEPSE has moved more than 10 percent, up or down, within the trailing thirty days. Any urge to amend this document outside the scheduled review, especially an urge felt during a sharp market move, is itself treated as a signal to re-read the document as written, not to change it.

Notice what this document does and does not contain. It does not name specific stocks Sunita currently owns, because a constitution governs behaviour and structure, not a single point-in-time portfolio; the actual holdings will change over the years while the rules that govern how they change should not need to change nearly as often. It does not predict where the market is going, because a constitution is not a forecast — it is a set of conditional instructions that work whether the market rises, falls, or goes sideways. And it is short enough that Sunita can genuinely re-read the whole thing in about four minutes, which matters enormously, because a document too long to re-read quickly during a crisis provides no protection during the exact moment it exists to protect against.

One more feature of Sunita's document is worth naming directly: notice that Section Seven locks the amendment process behind a calm-market condition, exactly mirroring the logic of Odysseus and the mast. She cannot rewrite her own rules during the very conditions those rules exist to guard against. This single clause is arguably the most important sentence in the entire document, because without it, every other section is just a suggestion that stress can override on the day it matters most.

Writing your own version does not need to look exactly like Sunita's. Your numbers, your goals, your dates, and your risk tolerance will differ, and they should — this is a personal document, not a template to fill in mechanically. What should not differ is the discipline of writing each section down honestly, in specific and actionable language, before you need it, and reviewing it only on a schedule you set in advance rather than in reaction to a headline, a friend's excitement, or a red number on a screen.