We have chosen Investment Policy and Index Numbers as the title of this paper, because the origin of the Actuaries' Investment Index is to be found in a paper, The Statistical Groundwork of Investment Policy, by the late C.M. Douglas (T.F.A. 12, 173).

The main policy consideration discussed by Douglas was the extent to which offices should invest in equities. Douglas maintained that funds should only be invested in equities if greater security was thereby obtained. To establish the suitability of equities, it was necessary to study the relative variations in equity prices, debenture prices and business activity. For this purpose, index numbers were required.

From a study of index numbers covering the period 1924-28 Douglas concluded that share prices were related to the level of business activity, i.e. to the progress of the ‘trade cycle’, equity prices following the cycle directly, and debenture prices following the cycle inversely, but with a different tempo and interval. If, therefore, an investor could judge the future trend of business activity, a sound investment policy could be pursued.

In this paper we propose to review some of the developments that have taken place in the principles and practice of investment policy over the last twenty-five years, and to study the contribution to these principles that the Actuaries' Investment Index and other index numbers can provide. In addition, we propose to review the methods used in the construction and maintenance of the Actuaries' Investment Index in the light of current conditions.