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An Example of an Investment Policy Statement
An Investment Policy Statement (IPS) is a strategic document used by financial advisors to outline guidelines that can help launch and manage a client's investment program.
It can be an important and useful tool because it lays the foundation for a client-financial advisor relationship and provides an objective course of action. The IPS details include how the advisor will make investment decisions. A solid IPS is a guide to your financial future.
Many financial advisors have their own version of an investment policy statement. They can then tailor it to the specific financial and investment situations and perspectives of individual clients.
- An investment policy statement is a strategic document that outlines guidelines for achieving a client's investment goals.
- It lays the foundation for the client-financial advisor relationship and details how the financial advisor will make investment decisions.
- It can serve as an objective course of action to prevent emotions from driving unwise investment decisions.
- An IPS should be tailored to each client's financial and investment situations and perspectives.
- The look and style of an IPS may differ from firm to firm; some components may depend on an individual client's needs and goals.
What Is an Investment Policy Statement?
An IPS is the map, activity schedule and outcome document between a financial advisor and client. The first section of the statement includes the client’s broad investing goals and objectives. The next component discusses the path that the advisor, in collaboration with the client, follows to reach a set of goals.
The details include topics such as asset allocation , risk tolerance , and financial goals.
Take a look at the following fictitious example of an Investment Policy Statement.
Investor First Advisory, LLC Investment Policy Statement for Juan Martinez
Juan Martinez, Individual Investor, age 55
Portfolio: Individual, Taxable
Tax ID: xxx-xx-xxxx
Current Assets : $500,000
Return Goal: 6%
One year loss limit (worst case scenario): 15-18%
- Long-term growth and capital preservation
- Risk profile: Conservative
- Time horizon : Greater than five years
- Short-term liquidity needs: None
- Long-term rate of return expectation: 6% (based upon historical rates of return)
Financial Advisor Duties and Responsibilities:
- Fiduciary , non-biased third-party charged with helping clients meet long-term financial goals.
- Confer with client to create asset allocation.
- Select assets in accordance with asset allocation providing sufficient diversification of risk and returns.
- Control and report all investment costs.
- Monitor all investment options and portfolio custodian . (Custodian is responsible for safekeeping of client’s assets.)
- Value all portfolio holdings on a regular basis.
- Provide monthly reports that include securities, cash flow, income, and the monthly change in value.
Portfolio Selection Guidelines:
In general, long term investment performance is determined by asset performance . Historically, stock assets offer higher rates of return along with greater volatility . Fixed income assets generally yield lower rates of return, have lower correlation with equities, and less risk. Diversification across asset geography and size is recommended.
Based on the client’s conservative risk profile, the portfolio asset allocation will be 60% stock assets and 40% fixed.
The individual composition of holdings will be selected from index funds and exchange-traded funds from the following asset classes:
- International, including developed and developing markets
- Corporate Bonds
- Government Bonds
- High-Yield Bonds
- Real Estate Investment Trusts (REIT)
- Global Bonds
- Global REITs
Rebalancing of Asset Allocation:
According to data from Vanguard, there is no universally agreed upon asset allocation. Neither is there data to recommend rebalancing more frequently than annually. Thus, the portfolio will be rebalanced annually, while attempting to minimize the tax consequences of asset sales .
Each index mutual fund's or exchange-traded fund's return will be compared with its related benchmark . Any deviation from that benchmark will be evaluated and discussed annually. The holdings will also be compared with peer group funds.
The parameters for selling a fund due to poor performance include one year of greater than 1% deviation from the benchmark and/or falling in the bottom half of the cohort fund group.
Costs will be monitored annually to ensure that total costs do not surpass 1% of all investable assets.
Annually, at a minimum, the overall portfolio will be monitored to consider whether initial goals are in place or have changed. Performance and fees will also be included in this conference. Together, Mr. Martinez and the advisor will determine the future portfolio direction.
Clients have a role in the IPS beyond providing the information that can help tailor it to their personal needs. They must review it and signal agreement with it by signing it. They should also review the IPS at least annually and bring any concerns about it to their financial advisor's attention.
What's an Investment Policy Statement?
It's an agreement between a client and financial advisor outlining how the financial advisor will meet the client's investment goals. It should be tailored with the client's specific financial and investment details as well as the financial advisor's costs.
Why Is an Investment Policy Statement Important?
An investment policy statement is important because it documents the guidelines for the plan that will implement a client's investment program. It can also prevent emotions from overtaking the investment decision-making process in financially turbulent times.
What Should Be Included in an IPS?
The components of an IPS for a particular client should be tailored to that client's details and needs. Generally speaking, though, an IPS may include a client summary, client objectives, financial advisor duties and responsibilities, portfolio selection and rebalancing guidelines, performance monitoring guidelines, and advisor costs.
An investment policy statement is personal and customized for the circumstances of the advisor’s client. The previous example is one type of IPS. Each financial advisory firm will have its own version.
Large investment brokerage companies also have investment policy statements for their individual mutual funds and/or client groups. The investment policy statement keeps both the client and advisor on the same investing page and holds the advisor accountable to a certain standard.
CFA Institute. " Elements of an Investment Policy Statement for Individual Investors ."
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How to Create an Investment Policy Statement
Use this document to outline parameters for your portfolio and keep your holdings in good shape.
A version of this article was published in June 2017.
Some financial advisors prepare complicated investment policy statements for their clients, complete with appendixes, footnotes, and legal disclaimers. And having an investment policy statement is a wonderful way to help articulate your investment plan and keep it on track. But your IPS needn't be overwrought.
Rather, at its most basic and useful, an IPS documents the parameters of your investment plan: the asset allocation framework, criteria for selecting securities, and the system to maintain those investments on an ongoing basis. Used in conjunction with a master directory (and a retirement policy statement, if you're retired or getting close), an IPS can be an invaluable tool for keeping tabs on your investments. Such documents will also aid your loved ones if, for whatever reason, they need to be able to obtain a quick and thorough overview of your investment plan.
If you've been an "investment collector," rather than an investment planner, up until now, it's not too late to think through your approach and commit it to writing.
We've created an investment policy statement template you can use to document your strategy, but you can also customize your own IPS in a Word document. If you're investing for multiple goals--retirement as well as college, for example--it will probably make sense to create a separate IPS for each goal.
While an IPS isn't likely to contain as much personally identifying information as a master directory, it's still valuable to protect these documents. Note that our IPS template is designed for users with access to Adobe Acrobat, which enables password-protection for documents. If you are opening this template with Adobe Reader (rather than Acrobat), print the document and write in the fields provided. Then store the document in a safe location, such as a locked file drawer or safe deposit box. Alternatively, if you'd like to customize your document, set up a file with similar fields in Microsoft Excel or Microsoft Word. Both programs enable password protection for your document.
No matter what format you use for your directory, be sure to follow these steps.
Step 1: Document Your Goals
Documenting your goals might seem straightforward, but there's more to this section than meets the eye. If your goal is to fund retirement, for example, goal duration means forecasting your life expectancy (and that of your spouse, if you have one). Planning for a very long retirement is usually a good policy, but it doesn't make sense for everyone.
Quantifying how much you'll need for retirement is even more complex, requiring you to forecast not just unknowables such as your life expectancy and rate of investment return but also to factor in your own variables, such as how your spending might change in retirement and whether you have nonportfolio sources of income such as a pension. Tools such as T. Rowe Price's Retirement Income Calculator can help you come up with a realistic estimate of your goal amount.
Step 2: Outline Your Investment Strategy
We've only left a few lines here, and that's by design: The idea is to be succinct. (If you went through our "investment approach on a note card" exercise, you already have the raw materials.)
An investment strategy for accumulators, for example, might be, "To invest primarily in low-cost index funds, increasing contributions along with salary increases. Begin with an 80% equity/20% bond mix, transitioning to 60% equity/40% bond by retirement." An investment strategy for retirees might be, "To invest in dividend-paying equities and bond mutual funds to deliver a baseline of income; regularly rebalance to provide additional living expenses. Target a 50% bond/50% stock mix."
Step 3: Document Current Investments
Here you're documenting all of your accounts of a given type, as well as their most recent values. While our IPS template requires you to amalgamate all of your accounts of a given type--the IRAs for both you and your spouse, for example--you can append additional pages to create a more granular view of your holdings.
Step 4: Document a Target Asset Allocation
If your first thought is, "But I don't have a target asset allocation," let this section be your impetus to arrive at one. If you're coming up with an asset allocation for retirement, your spending rate from your portfolio is a key variable. Setting an asset allocation for college is a bit simpler because the time period for spending is much more knowable. Determining how to invest for shorter-term goals is more straightforward still; my bias is to avoid unnecessary risks.
Because your portfolio's actual asset allocation is going to bump around a bit based on market performance (and, perhaps, active asset allocation decisions from you or your fund manager), it's sensible to express your target allocations to each asset class as a range rather than a specific target. If your range for equities is 65% to 75%, for example, that means you'll rebalance when your equities weighting goes below 65% or above 75%. For the major asset classes, a range of no fewer than 5 and no more than 10 percentage points is sensible.
Setting your allocations to U.S. stocks, foreign stocks, bonds, and cash is the main job here. But for investors who would like to embed "tilts" into their portfolios--toward small-cap or emerging-markets equities, perhaps--we've also included lines for you to specify how much you'll dedicate to each of these subasset classes.
Step 5: Outline Investment Selection Criteria
Use this area to specify the characteristics that you'll look for in each investment type (and that you'll hold them to, on an ongoing basis). For example, you might specify that your equity holdings have Morningstar Ratings of at least 3 stars, or that your mutual funds must have Morningstar Analyst Ratings of Bronze or better. (Morningstar's analyst-driven ratings, whether star ratings and Economic Moat Ratings for equities or Analyst Ratings for mutual funds, are good variables to include among your monitoring criteria because they take multiple factors into account.)
You needn't specify parameters for each of these areas included on our template. For example, if you invest exclusively in index funds, you'd skip the sections related to management tenure and might instead specify that your holdings should each have expense ratios of less than 0.20% per year.
Step 6: Specify Monitoring Parameters
Implicit in outlining all of the above policies--from asset allocation to investment-holding specifics--is that you'll periodically check in on your portfolio to ensure that it still passes muster.
In this section, you'll specify how often you'll check up on your portfolio. Less is more, in my view, which is why the maximum monitoring frequency included here is monthly. You'll also outline when you'll rebalance. Rather than rebalancing at specific time periods, I recommend rebalancing only when exposure to the major asset classes is 5 or 10 percentage points from the targets. (If you've set target ranges for your asset allocation in the section above, that will determine your response in this section.)
And because the best portfolio checkups are focused, it's best to specify what you'll look for as you review your portfolio. I like to start by focusing on the most important variables, like whether the portfolio is on track to meet its goals and whether its asset allocation is in line with the target range. Then, if time permits, you can focus on smaller-bore issues, such as your portfolio's performance relative to a benchmark with like-minded asset allocations.
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Investing and Personal Finance
How To Write an Investment Policy Statement – Template & Example
Last Updated: March 22, 2022 No Comments – 6 min. read
An investment policy statement is a formal document that defines one's investing objectives and strategy. Here we'll look at how to write one, the benefits of having one, a template, and an example.
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Introduction – What Is an Investment Policy Statement?
An investment policy statement is a document that outlines the parameters for how a portfolio will be managed and what its objectives are. They are used by portfolio managers of funds and between financial advisors and their clients.
The investment policy statement, or IPS for shorthand, keeps the investing strategy and its manager on the rails by setting guidelines within which the investment portfolio must be managed. Think of the IPS as just a formal investing roadmap written down in detail. Naturally, it contains information such as asset allocation , strategy, time horizon, goals, risk tolerance, monitoring procedures, review timelines, liquidity requirements, etc. The IPS also self-referentially specifies when and how the document itself can (and cannot) be changed in the future, such as updating for major shifts in income or lifestyle, and disallowing changes based on short-term market behavior.
Now let's look at why you'd want to have an investment policy statement.
Benefits of Having an Investment Policy Statement
In the context of a portfolio manager or advisor-client relationship, the investment policy statement sets clear parameters that must be adhered to, such as asset types that can or cannot be bought in the portfolio, thereby establishing unwavering boundaries for the investment manager to work within. This provides clarity and peace of mind for the client and is one safeguard against misconduct. The document also provides a reference point for the manager to look back at anytime an investing decision is made, or for someone else to view to get a quick overview of one's investing plan.
In the context of a DIY retail investor, writing an investment policy statement for oneself is not a common exercise, but it can be useful in a couple key ways. First, the exercise can provide a way to organize a collection of thoughts and ideas into an actionable investing plan, which is great for beginners who may be experiencing information overload.
Secondly, recognize that due to inherent biases from being human, investors are usually their own worst enemy. Investment plans typically fail due to investor behavior, not market performance. This can come in the form of detrimental things like performance chasing, emotionally reacting to short-term market noise, overconfidence, and loss aversion, to name a few.
As mentioned, having an investment policy statement at least provides one layer of insulation from emotionally-driven investing decisions because it must be consulted before action is taken. Any proposed changes must be squared with the stated objectives and parameters established within the IPS. If nothing else, it delays – and hopefully prevents – irresponsible action and helps investors keep their eyes on the prize in the far future. The IPS helps keep the investor focused on the long-term journey.
Without an investment policy statement, investors are prone to make emotional, reactionary, biased investing decisions such as the following:
- Buying a stock or fund simply because they see everyone else is buying it, likely based on a recent run of outsized performance. This is called herding or performance chasing . (ARK, anyone?)
- Buying or selling more of an asset than usual in anticipation of or during a market crash. This is called market timing , and it's usually more harmful than helpful.
- Similarly, shifting allocation due to recent market behavior. This is called recency bias .
- Changing investing strategy after underperforming a popular index for some period of time, even though the strategy that underperformed is appropriate for the investor's need, capacity, and tolerance for risk . This is called tracking error regret .
- Buying or selling an asset after a well-known hedge fund manager says to. This is called authority bias .
As you can imagine, the value of the investment policy statement really shines during periods of market turmoil when there's blood in the streets and your conviction and risk tolerance are tested in the face of uncertainty.
So now that we know why an investment policy statement can be useful, let's look at how to write one.
How To Write an Investment Policy Statement – An Outline
This list is not necessarily exhaustive, but here are some pieces of information you'd probably want to include in your investment policy statement:
- Where are the assets held? E.g. broker(s) like Vanguard or M1 Finance , crypto exchanges, TreasuryDirect.gov , a local credit union, etc.
- What account types exist and how much is allocated to each one each year? E.g. HSA , Roth IRA, 401k , taxable account, etc.
- Short-term goals and liquidity needs, e.g. emergency fund , downpayment for a house, new car, etc.
- retirement age
- time horizon
- value needed at retirement, likely based on a SWR estimate .
- Subsequent need, capacity, and tolerance for risk .
- Asset classes to include or exclude, e.g. U.S. stocks, international stocks, U.S. treasury bonds, savings bonds , gold, etc.
- Security selection criteria and strategies to include or exclude, e.g. passive index funds, rules-based active funds, actively managed funds, options-based funds, etc.
- Target asset allocation for different asset classes, e.g. stocks and bonds, and potential glidepath thereof (when it will change).
- Target allocation ranges for specific assets and market segments, e.g. U.S. small cap value stocks, Emerging Markets, etc.
- Rebalancing protocol, e.g. semiannually on January 1 and July 1.
- Tax loss harvesting protocol.
- Monitoring frequency.
- Performance benchmark(s), if applicable.
- Procedures that allow for future changes to IPS, e.g. changes in lifestyle, income, expenses, etc.
- Delineation of things that cannot change IPS, e.g. short-term market behavior.
Investment Policy Statement Example
An investment policy statement for an institutional portfolio manager or between an advisor and a client will probably be polished and complicated and at least several pages long. For our purposes as DIY investors, it doesn't need to be anything fancy; we can keep things pretty short and sweet and simple. This will save you time both writing it and revisiting it later to reference or update. So here's a relatively simple example of what that might look like for the average investor.
Note that the following example is purely hypothetical and is for illustrative purposes only. It is not financial advice. It is not an indication of any sort of investing strategy. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned.
Investment Policy Statement Template
If you want to, you can use the investment policy statement example above as a template to write your own. I've included links for Google Doc and Plain Text (.txt) versions below.
Remember once again that this investment policy statement template is purely hypothetical and is for illustrative purposes only. It is not financial advice. It is not an indication of any sort of investing strategy. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. If using it as a template to write your own IPS, you must change the parameters to match your own personal goals, time horizon, strategy, risk tolerance, and other circumstances.
Plain Text (.txt)
While it may simply seem like a formality, an investment policy statement can prove extremely useful in times of uncertainty when you're tempted to make emotional adjustments to your portfolio that will likely prove more harmful than helpful. The IPS can be as simple or complex and as vague or specific as you'd like. If nothing else, it serves as a robust reminder and a guidepost to keep your investing plan on track.
Do you have an investment policy statement? Are you considering writing one? Let me know in the comments.
Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here .
Don't want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com .
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How to Write an Investment Policy Statement
An easy-to-understand IPS that aligns with your financial goals and values can guide your decision making or help investment management firms build a portfolio that grows with you.
Although portfolio managers and clients typically use Investment Policy Statements, you can create one if you self-manage your investments .
What Makes a Good Investment Policy Statement?
A good IPS will address two things. First, it will clearly outline your investment objectives with benchmarks for your desired diversification and existing assets.
Second, it will tell your investment advisor–or you, if you intend to self-manage––how to measure your portfolio’s performance, taking both return and risk into account.
A good policy statement defines your investment values, informs the systems you create to monitor those investments, and sets expectations on how your Financial Advisor reports back to you.
Investment Policy Statements give you and your brokerage a concrete investment plan to reference before making changes to your portfolio.
4 Components of an Investment Policy Statement
The main sections of an Investment Policy Statement are your executive summary, objectives, management responsibilities, and asset allocation strategy.
We’ve outlined the most important items to include in each section, so you can use them as a template to write your IPS.
1. Executive Summary
In this section, you’ll outline your name, age, portfolio descriptions, state of residence, tax ID, current assets’ value, return goal, risk tolerance, and capacity.
2. Investment Objectives
Before diving into random stocks on the next popular investing app, learn the ins and outs of investing and map your investment objectives.
Some examples of objectives in an Investment Policy Statement include long-term growth and capital preservation, your risk profile, your time horizon, your short-term liquidity needs, and your long-term rate of return expectation.
3. Financial Advisors’ Duties and Responsibilities
If you’re working with a Financial Advisor, this section is where they would list their duties and responsibilities, including their fiduciary duty, when they need to confer with you, how they should invest, and how often they report back to you.
4. Portfolio Selection Guidelines
Your portfolio selection guidelines inform your asset allocation strategy; no investment strategy is complete without an asset allocation plan.
Asset allocation is a diversification method designed to balance the risk and portfolio returns of investment vehicles. You should build these guidelines thoughtfully.
This section will include a breakdown of what percentage your manager should invest in stocks vs bonds and the percentage of investments broken down by asset class.
Know Your Risk Tolerance
Your risk tolerance is the variability in investment performance you can withstand. You may also hear it used interchangeably with investment risk.
Sometimes risk is determined by market conditions, but other times it’s informed by the types of portfolio assets you choose to invest in .
Your age and your risk tolerance are often correlated. Some investors use the rule of thumb of 120 minus your age.
This rule of thumb tells you what percentage of your investments to invest in equities, such as stocks. Based on this rule, a 30-year-old would keep 90% of their investments in stocks.
However, the rule of thumb doesn’t consider your present cash flow, tolerance for risk, or what level of volatility would be a deal breaker for you. It’s a shortcut, but it’s not always an honest assessment of the true level of risk you’re willing to tolerate.
Risk management is an integral part of any individual investor’s toolkit and good risk management shows a bit of flexibility, weighting your financial objectives against a realistic forecast of market conditions.
It also needs to consider how much you have saved. A 30-year-old with $1 million saved in a retirement plan could have a much different risk tolerance than a 30-year-old with $10,000.
Know your Risk Capacity
Your risk capacity complements your risk tolerance. Although risk capacity isn’t discussed as much, it is just as, or more important than, your risk tolerance.
Risk capacity is how much risk you’ll need to tolerate to meet your investment goals.
For example, emerging markets may have higher rates of returns than developed markets, but it doesn’t come without risk. Index and mutual funds can spread out this risk more.
If your goals require significant investment returns, your risk capacity would be much higher.
If your risk capacity and tolerance don’t match, it might be time to reevaluate your goals or put your IPS through a round of revisions.
Rebalancing Asset Allocation
Rebalancing is buying or selling investments to realign them with your target asset allocation.
Your investment management should rebalance your portfolio several times throughout its lifetime. Market conditions will alter your portfolio, and your financial goals will change.
You’ll need to reassess your assets. You may need to buy or sell assets to protect yourself against risk and meet your financial goals.
You can rebalance monthly, quarterly, or annually or when your asset percentage changes over 5%.
You’ll need to decide how to monitor your investments’ performance. You should set a benchmark and accepted deviation from that benchmark in this section.
Performance monitoring is important with both passive and active investment strategies.
The Financial Industry Regulatory Authority (FINRA) has a lot of great educational resources on performance monitoring .
You or your portfolio manager will need to monitor yield and rate of return to determine if you’re making the right investments. Both metrics will be expressed as a percentage.
You can calculate the percent return like this:
(Change in value + Income) / Investment amount = Percent return
When calculating percent return, you’ll need to consider transaction fees, tax liability, inflation, and how your returns have changed year to year.
A portfolio manager may monitor performance, allowing you to be proactive instead of reactive, which can help you take advantage of larger returns in the long run.
Financial Plan vs Investment Policy Statement
The difference between a financial plan and an investment policy statement is the content. A financial plan may include an investment policy statement, but it is far more all-encompassing of your overall financial objectives.
On the other hand, an investment policy statement’s scope is limited to your investment program.
A certified financial advisor (CFA) can help you craft a financial plan that informs your objectives as you navigate the investment process.
Example Investment Policy Statement
We’ve built an example investment policy statement, so you have a benchmark of where to begin.
When you’re ready to write your own, use the following example as a template:
- Demographic: Sydney Kelley, Individual Investor, age 45
- Portfolio: Individual, Taxable
- State: Washington
- Tax ID: xxx-xx-xxxx
- Current Assets: $350,000
- Return Goal: 6%
- One-year loss limit (worst case scenario): 15%
- Primary goal: Long-term growth and capital preservation
- Risk profile: Conservative
- Time horizon: Greater than five years
- Short-term liquidity needs: Interested in a vacation home
- Long-term rate of return expectation : 6% (based upon historical rates of return)
Financial Advisor Duties and Responsibilities:
- Act as a fiduciary, non-biased third-party
- Create asset allocation based on client needs.
- Determine the best investment vehicles based on the asset allocation strategy
- Report on all investment overhead and additional costs
- Monitor all investment options and present options to the client
- Chart the value of all portfolio holdings regularly
- Provide monthly reports to client
Portfolio Selection Guidelines:
Fixed-income assets generally yield lower rates of return, have a lower correlation with equities, and have less risk than stocks, but a balanced investment portfolio diversifies across all kinds of assets.
The client’s moderate risk profile informs the assets the investment advisor should consider adding to the portfolio.
The risk profile will help the investment manager choose index funds and exchange-traded funds (ETFs) that align with your overall investment strategy.
The investment advisor will only purchase from the following asset classes:
- International, including developed and developing markets
- Corporate Bonds
- Government Bonds
- High-Yield Bonds
- Real Estate Investment Trusts (REIT)
- Global Bonds
- Global REITs
As you can see, an investment policy statement doesn’t need to be the next great American novel to be a sound investment strategy. All you need to do is be thoughtful and ask experts for their insight when you’re unsure about the best asset classes to invest.
Writing a good investment policy statement is as much an exercise in defining your interests and risk tolerance throughout the investment process as it is a concrete statement that informs your entire asset allocation strategy.
While anyone can begin investing , not everyone can invest with confidence or distill their financial goals into clear investment objectives that advisors can easily follow.
You may be interested in real estate, but not all investment styles fit managing rental properties or purchasing commercial real estate.
Instead, you may find that real estate investment trusts (REITs) allow you to take advantage of the market trends in real estate without taking on much more risk than the cash upfront.
Everyone’s strategies will be unique to them, so it’s always a good idea to start fleshing it out on paper before making any irrevocable decisions.
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We work hard to share thorough research and our honest experience with products and brands. Of course, personal finance is personal so one person’s experience may differ from someone else’s, and estimates based on past performance do not guarantee future results. As such, our advice may not apply directly to your individual situation. We are not financial advisors and we recommend you consult with a financial professional before making any serious financial decisions.
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How to Write an Investment Policy Statement – A Guide to Help Keep Your Investments on Track
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Benefits of an Investment Policy Statement
Separate your decision-making from your action taking, your ips solidifies & defines your investment goals, your ips removes emotion from investing, downsides to not using an investment policy statement, elements of a strong investment policy statement, investment objectives & investment timeline, risk tolerance, asset classes to invest in (and which to avoid), asset classes to invest in:, asset classes to avoid:, target asset allocation, when to rebalance your investment portfolio, how often should you monitor or change your ips, other considerations for your ips, write your investment policy statement, review it, and sleep well at night, start investing now – and follow your ips.
Do you have an Investment Policy Statement (IPS)? If not, you are missing out on one of the key ingredients of a successful investing career.
An Investment Policy Statement is a written policy of your investment goals and objectives, helping you stay on track regardless of what the markets are doing. And every investor should have one – whether you’re just starting as an investor or you have weathered multiple bull and bear markets.
Investing is complicated, and having a written Investment Policy Statement will save you time, money, and energy. This is nothing new. Written policies and guidelines exist in many industries. You have probably used them many times in your career.
My first exposure to detailed written guidelines was when I worked in the US Air Force. We used Technical Orders, or T.O.s, each time we performed maintenance on an aircraft. As you can imagine, aircraft maintenance is very technical, and a lot can go wrong if you make a mistake. That is why we were required to use T.O.s when performing maintenance. Following those manuals ensured we only took prescribed methods for repairing the aircraft, which didn’t skip any steps. This produced safer and more consistent results. I do the same thing in many areas of my life today, including running my business and managing my investment portfolio.
Let’s take a detailed look at Investment Policy Statements : What it is, why you need one, benefits, how to write your IPS, how often to monitor it, when to make changes, and much more. Buckle up, this is a 4,000-word guide that will show you everything you need to know about writing your IPS!
There are many benefits of an IPS. Investing can be complicated, and your IPS will act as a guide to follow regardless of what is happening in the stock markets or the rest of the world. Here are some of the benefits to creating and following an IPS:
As a small business owner, I create and follow business rules to ensure I stay on track. These business rules produce more consistent results with fewer resources. It makes sense when you think about it – written business rules mean you don’t have to rethink every decision.
You simply refer to the guidelines you created and follow the steps you have already decided to take.
Investing means you don’t need to recreate the wheel each time you contribute to your 401k, IRA, or brokerage account. You don’t need to sit through half an hour of stock analysis of portfolio balancing before deciding to buy a stock or mutual fund . You have already made your decisions. Your IPS is there to follow.
But here is the key: You should separate these two actions . The best time to make decisions is when you have a clear mind and aren’t under any pressure. Trying to couple investment research and analysis when trying to make an investment decision often overwhelms you. Take the time to document your Investment Policy Statement, and the heavy lifting is already done. You just need to take action and adjust accordingly.
Writing your investment goals on paper makes them real. There is a huge difference between saying, “I want to retire someday,” and, “I want to retire at age 55.”
You will notice the first statement is vague, while the other is a SMART Goal (specific, measurable, achievable, realistic, and time-based).
Your IPS will also include the investments you will use to reach your investment goals. This is helpful when you are thinking about investing in the next big thing – Bitcoin or other cryptocurrencies, binary options, the next big IPO, etc. Is this in your IPS? If so, then go for it, if it otherwise meets your investment objectives. Otherwise, skip it and rest in the knowledge you are investing within your defined plan.
Investing is fun when you’re winning and terrible when losing. Unfortunately, mixing emotions and investing is never a good idea. Once you start letting emotion rule your investing decisions, you end up with clouded judgment – and a greater likelihood of losses.
Developing and using a written Investment Policy Statement will help you reduce emotion’s role in your investment decisions. An investment policy statement codifies your goals and strategy, offering you a plan to follow as you manage your portfolio – no matter how large it is .
Your investment policy statement can provide guidance, and it’s a great tool to fall back on when you start getting nervous about your portfolio.
Without an IPS, you are leaving your investments to conjecture. You’re submitting to the whims of your emotions and how you “feel” you should be investing. You will be more likely to chase returns, and invest in the hot sectors instead of taking action toward your goals.
In short, you will be shooting from the hip instead of taking precision aim. There is a time and place for spontaneity. Investing is not in that time or place.
An Investment Policy Statement does not have to be complicated. But it does need to have sufficient information on it to help keep your investments on track. Let’s take a look at what you need to write a good IPS:
- Investment Objectives & Investment TimeLine
- Asset Allocation Targets
- When to Rebalance Your Portfolio
- Monitoring Frequency (and When You Will Make Changes to Your IPS)
These seem like a lot, and it is. But you can simplify each of these and in some cases, boil them down to one or two sentences. The simpler you make this, the easier it will be to review your IPS and ensure you stay on track.
Let’s take a look at these in greater detail:
The first thing you need to do as you write your investment policy statement is to identify your long-term goals. What do you want your money to accomplish on your behalf? Whether you are planning to buy a home or whether you want to save for retirement, define the goal.
As I wrote above, your Investment Objective could be as simple as, “to retire at age 55.”
Of course, most of us have more than one goal, so you can also expand upon this. Try to prioritize your investment objectives when you write them. This will serve as a reminder of which goal is more important. In the example below, we have retirement savings listed above, saving for children’s college. We all want the best for our children, but they can always borrow their way through college. You can’t borrow your way through retirement. So consider this when creating your Investment Objectives.
Example Investment Objectives:
- Objective 1 : Retire at age 55 or earlier
- Objective 2 : Have investments support annual withdrawals of $50,000 per year, based on a 4% withdrawal rate ($2,000,000 investable assets)
- Objective 3 : Pay for 50% of children’s college tuition (assuming tuition will cost $10,000 per year).
- Objective 4 : Maintain 6 months of living expenses in liquid funds at all times as emergency funds (assuming $5,000 per month of living expenses).
As you can see, each of these objectives is listed as a SMART Goal and prioritized according to importance. (OK, maybe it’s not exactly listed like a SMART Goal, but the writer will know their age, when their children will attend college, and the other information to fill in the gaps). The key here is to define what is important to you and list your investment objectives with specific details.
Take some time to think about your investment objectives. These online retirement planning tools may help form a realistic retirement timeline.
Only Include Goals You Are Actively Pursuing . You can include any financial goal that is important to you, such as paying off debts, saving for a home, taking a vacation, buying into a business, or any important goal. Remember – this isn’t a dream sheet that lists everything you “want to do one day.” These are the actual goals you are working toward.
Now that you know your investment goals, you need to consider your risk tolerance. Your risk tolerance should take into account the time horizon for achieving your goal, as well as what you can financially handle. This should include your emotional risk tolerance.
Many people believe they are more risk tolerant than they are. As I mentioned above, investing feels great while you’re ahead but even worse when you start losing money.
The key is to strike a balance between your stocks, bonds, and other securities to achieve growth and stability.
Once you know your risk tolerance, you can use that to guide your investment choices. Stay away from investments that are too risky for your tolerance level – no matter how exciting they seem. Additionally, recognizing that you might be too averse to risk can help you create a plan that corrects this issue and helps you grow your wealth more effectively.
Your Risk Tolerance will directly impact your Asset Allocation (see below for more information).
Asset classes are the building blocks of your investment portfolio. Asset classes can be defined as a group of similar securities and often have correlations in the marketplace. They are often governed by the same laws, regulations, and tax rules.
There are three main categories of asset classes, including stocks (equities), bonds (fixed income), and cash or cash equivalents. Some investors include real estate, precious metals, and commodities as asset classes.
You can further categorize asset classes based on their underlying securities. For example, you can consider US and International stocks under the equities umbrella.
Here is an example of the types of investments you may wish to include in your IPS, and some you may wish to avoid. You can include specific funds if it makes things easier.
- US Stocks (US Total Stock Market, S&P 500 index)
- International Stocks
- US Government Bonds ( Treasury Bonds , TIPS )
- US Corporate Bonds
- International Bonds
- Real Estate Investment Trusts (REITS)
- All of the above should be held in low-cost in index funds, when available
- Individual Stocks / Company Stock
- Actively Managed Mutual Funds / Hedge Funds
- Precious Metals
- FOREX (Currency Trading)
The types of asset classes you list to invest with, or avoid, can include stocks, bonds, mutual funds, ETFs, Real Estate Investment Trusts (REITS), investment real estate, precious metals, commodities, and other investments. Just make sure they meet your investment objectives.
Why this section is important: Writing down the types of investments you will use to reach your investing objectives helps keep you on track. Not sticking to your plan makes it too easy to get caught up in investment hype. There will always be hot sectors, new asset classes, and popular investments. You want to avoid trying to hit a home run with every investment. Playing the long game is the way to go. With investing, slow and steady wins the race!
Use your investment goals, timeline, risk tolerance, and the asset classes you defined above to create your personalized asset allocation guidelines . Your goal is to define how much of your portfolio should be in stocks, bonds, and cash.
This should be done in two steps:
- Define your asset allocation (percentage in stocks, bonds, and cash equivalents)
- Define your asset targets by type (percentage of stocks by type; percentage of bonds by type)
Step 1 – Asset allocation (percentage of stocks and bonds): This is what many people think of when they hear the words asset allocation. What percentage of your investments will be in stocks, bonds, etc.? For example, if you are young, you might want an 80/20 portfolio, with 80% of your investment portfolio in stocks and 20% in bonds. You may wish to have a more conservative investment portfolio as you get older. Through the years, you might transition from 80/20 to 75/25, to 70/30, to 65/35, to 60/40, etc.
Don’t know what your percentages should be? This comes back to your investment timeline (how long until you need the money) and your risk tolerance. If you still don’t know, then a good place to start is by looking at Target Date Retirement Funds , which are designed with a specific retirement date in mind. They are automatically allocated based on the target retirement date and are generally a decent reference starting point. Just use them as a starting point. You should determine your own risk tolerances.
Step 2- Asset Targets by Type: This is where you define how much of each type of investment you have in your portfolio. You can do this by combining the Assets You Will Invest In, with your Target Asset Allocation percentage. Let’s look at an example:
Let’s say your target is an 80/20 portfolio with the assets listed in the above section. It could look something like this:
Target Asset Allocation by Type (80/20) : (Note: the total percentages should equal 100%, with stocks accounting for 80% of your investment portfolio. In this example, we are treating REITS the same as stocks. You can further break down the categories into sub-categories, as shown in this example).
- US Stocks – ( 45% – 30% large cap, 15% small cap)
- International Stocks – ( 25% – 15% developed, 10% emerging markets)
- US Government Bonds – ( 10% – 5% Treasuries, 5% TIPS)
- US Corporate Bonds – ( 5% )
- International Bonds – ( 5% )
- Real Estate Investment Trusts (REITS) – ( 10% )
As needed, you can change these percentages to meet your risk tolerance and investment objectives. For example, some investors think it’s OK to have all your equities in US-based markets , while others believe you should have some international stock exposure. Neither is technically right or wrong – only right or wrong for your asset allocation model and thus for your IPS.
The easiest way to ensure your asset allocation is on track : Managing an investment portfolio can be tricky, especially when you have money spread throughout different investment accounts (401k, IRA, taxable investments, etc.).
I use a free online investment portfolio management tool called Personal Capital . Personal Capital has a free portfolio analysis tool that can securely link to your investment accounts and banks to help you understand how each asset in your portfolio works together. It’s an excellent tool. I use it each month when updating my net worth spreadsheet. You can sign up for a free account at the Personal Capital website .
Your investment portfolio will change over time. When your investment portfolio is small, your contribution can move your assets outside their targets. Don’t worry about this too much when you are younger. Over time, your portfolio will grow and your contributions will make up a smaller percentage of your portfolio, with each contribution having a smaller impact at the time it is made (but don’t stop your contributions, compound interest is an amazing force !).
You want to look out for when your investment portfolio changes due to market fluctuations. A mix of stocks and bonds is meant to decrease volatility in your investment portfolio and smooth your investment returns. By sticking to your asset allocation, you are forcing yourself to have the discipline to sell high on investments when you go over your target allocation and buy low when you are under your allocation.
For example, when your target stock allocation is 80/20, but a recent run-up causes your allocation to trend toward 90/10, you would sell 10% of your stocks and buy an equivalent amount of bonds to bring your allocation back in line with your target allocation of 80/20.
When should you rebalance your investment portfolio? There are two schools of thought, and both work well.
- On a set schedule, such as once per year (your birthday is a good day)
- When your asset allocation exceeds a pre-determined threshold (for example, more than 5% outside of your target).
1. You can use any date for a scheduled rebalance . Many people suggest not doing it on the beginning or end of the year because a lot of money enters the market during those times, as many people are funding IRAs or other investments. My birthday is more toward the middle of the year, so that works for me.
2. When your portfolio exceeds a predetermined threshold . In this case, if your target allocation is 80/20, you wouldn’t rebalance your portfolio until it reaches either 85/15 or 75/25. You can make some trades at that time to bring your portfolio back in line.
Note: Don’t forget that asset allocation can and likely should change over time . You need to shift your asset allocation as you approach your investment goal. Create a timeline for changes to your asset allocation as you progress through life. Knowing what you plan to do next will help you stick to your investment objectives and risk tolerance.
Having this written down is also a good idea so you won’t react to the market’s moods. For example, you don’t want to ratchet up your stock allocation while things are going well (buying high), then swing the other way and change your allocation to include more bonds when the stock markets decline (selling low on stocks).
Your Investment Policy Statement should be a living, breathing policy. It should be reviewed regularly and changed if necessary. Your investment objectives will likely change as your personal and professional life changes. A lot can happen in just a few years – marriage, divorce, having children, becoming an empty-nester, getting promoted, losing a job, getting a raise, losing your job, starting a business, selling a business, relocating, winning the lottery, losing a loved one. The list is endless; any of these can change your goals and objectives.
When to review your IPS : I recommend reviewing your IPS at least once a year or any time you have a major life event .
You may not need to make any changes to your IPS. But regularly reviewing it will help remind you what is important to you and why it is important. The why is just as important, if not more so than the what. Regularly reviewing your IPS will also help you stay on track. This is important when things are going great, and you may feel like taking on more risk, and it’s especially important when the markets tank and you may be tempted to sell low.
Just be careful not to make changes based on emotion. Consider creating a time limit before acting on changes, such as 3 months or 6 months. That will give you additional time to reflect upon the current situation and avoid making emotional investing decisions.
Your IPS should be tailored to your needs. You can use the information in this guide to get started. But ultimately, your IPS should reflect your investment goals, timeline, risk tolerances, and needs.
You may wish to consider other factors that may influence your IPS, such as:
- Any pensions or annuities and how they might affect your risk tolerance or asset allocation
- Any life insurance policies you may have
- Social Security Retirement Benefits
- How you wish to prioritize the order of your investments – such as 401k up to company match, HSA as an Investment Vehicle , Max Out IRA , Max Out 401k , College Savings, Taxable Investments, etc.
- Where to place investments for maximum tax efficiency .
- How you will rebalance – I try to rebalance with new investment contributions when possible. Otherwise, I rebalance my tax-deferred retirement accounts to avoid taxable events and paying capital gains taxes .
- Any outstanding debt you may have
- Unusual estate planning needs
It’s important to add these additional considerations to your Investment Policy Statement so you can refer to them when you review your IPS. This will help keep your investments on track and help you avoid costly investment mistakes.
Now it’s time to take action. Write your Investment Policy Statement and create an action plan to fulfill your IPS. Start by thinking about what’s important to you. Be prepared to go through several drafts while you determine what is most important, develop your timeline, determine your risk tolerance, and develop your target asset allocation.
Be sure you include your spouse or partner if you have one. This is especially important if you are the person who normally manages all the money. You may have a higher risk tolerance than you spouse or vice versa. You generally want to be on the same page and find some middle ground. You also want your spouse to have buy-in so you will both be working toward the same financial goals.
Now it’s time to get started. Write a plan that sets forth how much you will invest each month, in which accounts you will invest (401k, IRA, college savings, taxable account, etc.) and which assets you will invest in.
In general, I like to prioritize my investments this way:
- 401k up to company match (Always take advantage of free money!),
- HSA as an Investment Vehicle ( read why an HSA is an amazing investment vehicle ),
- Max Out Traditional or Roth IRA – see where to open a Roth IRA
- Max Out 401k – even if you don’t get a company match
- College Savings – see where to open a Coverdell ESA (like an IRA for college)
- Taxable Investments – see our list of best brokerage accounts
- Long-term savings – see the best online banks with high interest rates
Stick to this order of operations; you will maximize your tax-deferred retirement accounts and get the greatest long-term tax benefits. You can invest with dollar cost averaging to make the most of your monthly contributions. Divide up your monthly contribution according to your stated asset allocation strategy.
How much you contribute each month should be based on your risk tolerance and your stated goals.
When written correctly, your Investment Policy Statement should be a succinct statement that guides you through your goals and risk tolerance, helps you pick an asset allocation, and then lays out your ultimate investment plan. While this guide to writing an Investment Policy Statement is several thousand words long, you should be able to keep your actual IPS to a single page.
Keep your investment policy statement somewhere you can access it easily and review your policy statement before you make any decision about your portfolio.
Looking for more inspiration? I recommend visiting the Bogleheads forum and wiki for more info on writing your IPS. I found it helpful when I created mine. Their website includes several examples and a forum where people discuss their IPS, why they make certain decisions when writing their IPS, and a lot more discussion on what investing is and other topics. This is my favorite financial forum by far.
Are you ready to write your investment policy statement? Roughly, what will it look like? Leave a comment!
About Post Author
Ryan Guina is The Military Wallet’s founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Illinois Air National Guard.
Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then.
Featured In: Ryan’s writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.
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Jake Erickson says
April 15, 2013 at 11:13 am
This is very well-timed article for me. My wife and I were just discussing this exact thing this past weekend. Hopefully by the end of the summer we’ll be able to begin investing and we’ll definitely utilize these steps to create a plan. I think our plan will consist of mostly mutual funds just because that’s what I understand and there are many different options within this one investment vehicle. Plus, it can get you a pretty high return with less risk than individual stocks.
Josh Stelzer, CFP says
April 15, 2013 at 11:56 am
Also consider ETF’s versus Mutual Funds. Same diversification advantages, but at a much lower cost. Mutual funds typical range from 1.00 – 1.35% in expense ratios per year. You never see these fees deducted from your account, but you do pay them. ETF’s come in around 0.15 – 0.50% in expense ratios. Saving money always helps!
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- Portfolio Management
How to Write an Investment Policy Statement
- Talk to Your Financial Advisor
- Define Objectives and Risk Levels
Set Your Asset Allocation Limits
- Establish the Mechanics
- Final Thoughts
An investment policy statement is a document that guides you and your financial advisor in reaching your financial goals. It's one of the most important things you will do as you start your journey to financial independence because it can help you think long-term and clarify your objectives.
Here's how to write an investment policy statement.
- Investment policy statements help you organize your financial goals and create a plan to meet them.
- You define your financial objectives and goals to help you create the statement.
- Setting allocation limits lets you manage your returns as you age and helps you manage your portfolio.
- Set up portfolio evaluations to make sure you're hitting your investing objectives.
Talk to Your Financial Advisor or Banker
First, sit down with a representative of the firm overseeing your assets and talk to them. Learn if they have any internal guides to their suggested investment decision-making process and ask them to walk you through their process.
Take out a piece of paper, grab a pen, and get ready to jot down a few notes as they talk. Ask questions about any terms or concepts you don't understand. Consider whether their process aligns with your goals, and clarify any differences as you write your investment policy statement.
Your investment advisor or firm may have their own investment policy statements. Review those and bring up any discrepancies between their statement and your priorities to ensure your financial goals are met.
Define Your Objectives and Risk Levels
What do you want your money to do for you? Why are you investing? The next step is sitting down and being honest with yourself about your objectives. Think about how much risk you want to take with your investments. Remember that speculative investments have higher returns, but you are at risk of losing your invested funds. For example, your plan might say:
- I want a portfolio that generates dividends, interest, and rents of $5,000 pre-tax per month by the time I am 62 years old so I can combine it with my Social Security income and live a comfortable life.
- I want to leave at least $100,000 as an inheritance to each of my children and grandchildren, possibly in a trust fund that distributes it to them as a group in equal installments over three years so they don't spend it all in one place or at one time.
- I want to sleep well at night even if it means growing my money a little more slowly than I probably should. The emotional trade-off is worth it.
For the first two items, you can use a financial calculator to determine the amount of money you'll need to set aside, as well as the compounding rate you'll need to earn on your existing assets, to hit your targets.
Next, after considering what a good rate of return is for each of the different asset classes, you need to set up your asset allocation limits in a way that allows you to meet your objectives over your specified time frame. You might address:
Maintaining Cash and Cash Equivalents
Consider maintaining at least 10% of your personal net worth in cash and cash equivalents so that if the world falls apart, you don't have to worry about buying groceries, gas, or medicine. This money doesn't have to earn a return. Sure, keeping pace with inflation is ideal, but it's not the primary concern. It's your reserve.
Maintaining High-Quality Dividend Holdings
Consider keeping at least 20% to 40% of your portfolio in high-quality, blue-chip stocks that pay dividends . Blue-chip stocks are in companies that are giants of domestic and international commerce that make up the backbone of the global economy. They might seem boring, and they might not grow as quickly as some next-big-thing stock, but they get the job done while giving you peace of mind. They should always be worth more 10 or 20 years from now regardless of any interim volatility.
Maintaining Real Estate or Cash Generation
Consider keeping some of your portfolio in directly-owned, cash-generating real estate. The rental income can help you fund other investments and it can be a backup residence if you need to move out of your home and downsize, offering an added dimension of utility.
Establish the Mechanics of Running the Portfolio
Decide how often you'll evaluate your portfolio to ensure you're within your predetermined limits and hitting your compounding interest goals.
You should also determine the investment philosophy you'll use to add new securities or funds to your portfolio. For example, your investment philosophy for conservative buy-and-hold blue-chip stocks might say, "I will only consider stocks that have increased their dividends for at least 15 years in a row."
Determine how regularly you will rebalance your holdings, or whether you will rebalance at all.
Set the measurement period you'll use to determine if your strategy is on track and working. Consider a timeline of at least five years. Anything less could reflect short-term volatility rather than the true performance of your investments.
Final Thoughts on Writing Your Plan
Make sure you write out, sign, and date your investment policy statement to keep yourself accountable. If you say you aren't going to allow a single stock or bond to exceed 5% of your portfolio, stick by your guidelines. If you're going to keep a certain amount in tax-free municipal bonds as an emergency fund, do it. Revisit your investment policy quarterly, semi-annually, annually, or bi-annually to ensure you are still on track.
Lehner Investments. " Investing vs. Speculating – The Key Differences Between Investments and Speculation ."
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Drafting Your Investment Policy Statement: 10 Critical Issues
Endowed institutions differ in their missions, capabilities and resources, and investment policy statements naturally mirror these differences. in that sense, there is no single ‘right’ investment policy statement; each institution’s board must craft a statement that responds to the needs of the institution and the preferences and risk tolerances of the trustees. .
Annual review of the statement by the board can help to ensure that it remains an appropriate distillation of the institution’s investment philosophy and practice. It can be said, however, that a properly drafted investment policy statement should address, at a minimum, the following ten issues:
1. Purpose of the investment pool
What is the purpose of the investment pool? What is its role in supporting the mission of the institution?
2. Duration of the pool
Is the fund intended to be perpetual in duration, or will it have a finite life? To what extent is maintenance of purchasing power an explicit goal?
3. Responsibility for investment decisions
What are the required qualifications of these individuals, and how are they to be recruited?
4. Delegation to a committee, a consultant, or a manager
If the board of trustees intends to delegate its authority to an investment committee or some other body or entity, how should that delegation be evidenced and documented?
5. Target return and endowment dependence
What is the investment pool’s target return, both in nominal and real (i.e., after inflation) terms? What is its expected annual contribution as a proportion of the institution’s operating budget or other relevant criterion?
6. Investment Strategy
What should be the overall investment strategy of the fund, including asset allocation targets and ranges, permitted and prohibited investment strategies and instruments?
What kind and degree of risk is the board prepared to take in pursuit of its investment goals? How are risks to be defined and measured?
How much liquidity should be maintained by the fund, either for investment needs within the fund or for wider institutional purposes?
How much of the endowment should be spent and how much reinvested? What rules determine how this amount is calculated?
10. The fund’s role in supporting the balance sheet
To what extent is the fund expected to assist in maintaining the balance sheet of the institution (for example, by supporting its credit rating)?
Click here to download our full whitepaper, The Investment Policy Statement and take a deep dive into the details.
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An indispensable resource for every financial service professionals developing an IPS
The Investment Policy Statement (IPS) is one of the most critical documents fiduciaries must draft. For years, ERISA and other industry regulations have governed the guidelines all fiduciaries must comply with when drafting one. But the current climate of corporate scandal and the 2008 global banking crisis have led to increased scrutiny by regulators, prompting firms to take a closer look at the quality and integrity of their IPSs and to take steps to have a rigorous formal process in place for drafting them. Endorsed by the Foundation of Fiduciary Studies, this concise guide provides a rigorous framework and the expert insight, information and guidance you need to guarantee that your IPS is in complete compliance with all ERISA-directed requirements.
- Provides a step-by-step plan for creating a uniform IPS that every advisor in the office can follow
- Defines the duties and responsibilities of all parties involved, while clarifying diversification guidelines and providing methods for keeping costs under control
- Packed with ready-to-use templates, sample forms, letters and other documents, diagrams and other valuable tools, including sample Policy Statement downloadable at the companion website
- Designed to get you quickly up to speed on what you need to know to confidently serve your clients with the highest standards of care and protection
- ISBN-10 1118679539
- ISBN-13 978-1118679531
- Edition 2nd
- Publisher Wiley
- Publication date June 24, 2013
- Language English
- Dimensions 5.52 x 0.28 x 8.5 inches
- Print length 80 pages
- See all details
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From the inside flap.
- Define the duties and responsibilities of all parties involved
- Clarify diversification guidelines and keep costs in check
- Identify due diligence criteria for selecting investment options
With this thorough guidebook, you can prepare documents that meet all industry standards of compliance and federal regulations with relative easeevery timewhile protecting yourself and your firm from liability.
From the Back Cover
With this thorough guidebook, you can prepare documents that meet all industry standards of compliance and federal regulations with relative easeevery timewhile protecting yourself and your firm from liability.
About the Author
Rocco DiBruno is the author of How to Write an Investment Policy Statement, 2nd Edition, published by Wiley.
- Publisher : Wiley; 2nd edition (June 24, 2013)
- Language : English
- Paperback : 80 pages
- ISBN-10 : 1118679539
- ISBN-13 : 978-1118679531
- Item Weight : 3.35 ounces
- Dimensions : 5.52 x 0.28 x 8.5 inches
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Investment policy statement
An Investment policy statement (IPS) is a statement that defines your general investment goals and objectives. It describes the strategies that you will use to meet these objectives, and contains specific information on subjects such as asset allocation , risk tolerance, and liquidity requirements. [note 1]
Alternatively, you could consider using a simpler investing plan (see below ):
- If you find creating a full Investment Policy Statement too complex
- If your investment objectives do not justify the effort needed to create an Investment Policy Statement
Benefits of using an IPS
Every investor could potentially benefit from having an investment policy statement. It provides the foundation for all your future investment decisions. It serves as a guidepost, identifies goals and creates a systematic review process. The IPS aims to keep you focused on your objectives during short-term swings in the market, and gives you a baseline from which to monitor investment performance of your overall portfolio, as well as the performance of individual fund managers.
If you are using some sort of financial advisor, an IPS outlines the ground rules of the relationship between you and that advisor. And you can use the IPS as a reference to see whether or not your portfolio is achieving your stated goals and objectives. You can also use your IPS to evaluate and review any proposed changes to your investments against your overall objectives.
A properly constructed Investment Policy Statement supports following a well-conceived, long-term investment discipline, rather than one that is based on false overconfidence or panic in reaction to short-term market fluctuations.
Drawbacks of not using an IPS
Someone without a written policy often bases decisions on day-to-day events, which regularly leads to chasing short-term performance that may hinder them in reaching long-term goals. Having a policy encourages you to maintain focus on the long-term nature of investing, especially during turbulent or exuberant times.
Basic sections of an IPS
Financial account information.
This area includes:
- Where are your financial assets located?
- How much is in tax-advantaged accounts ( IRA , Roth IRA , 401(k) , etc) versus taxable accounts?
- How much will you be contributing to these accounts?
Investment objectives, time horizon, and risk tolerance
Here you list the following:
- Your short-term financial goals and liquidity needs
- Your time-frame for funding these goals
- The length of time for which you will need these assets
- Amount of assets required
Asset classes to use and those to avoid
- U.S. Stocks
- International Stocks
- Hedge funds
- Actively-managed funds with high taxable turnover or distributions
- Consider under-weighting tech sector due to my employment there
Asset allocation targets and rebalancing ranges
This area lists the following:
- Your target allocation between stocks and bonds
- Your target allocation for international investments
- Any time-frame for altering these allocations
- The minimum and maximum deviations from these targets that will trigger portfolio rebalancing
Monitoring and control procedures
Here you list:
- Your frequency of monitoring
- Your benchmark for comparison of portfolio returns
- The acceptable deviation from benchmark (amount and time)
- Financial reasons for changing IPS
- Lifestyle reasons for changing IPS
- Any reasons not to change IPS (for example, short-term market performance)
Fellow Boglehead Sunny was one of the first to post a popular IPS. It may not cover all of the topics necessary for someone with a complicated financial situation, but his IPS is brilliant in its elegance and compactness. 
Other real-world examples
- Bogleheads forum post: "Investing Personal Statement for EmergDoc and Ms EmergDoc"
- Bogleheads forum post: "Peter Foley's Investment Policy Statement"
- Bogleheads forum post: "DaleMaley's Outline"
In some cases, a formal investing policy statement may seem too complicated or inconvenient. In that case, you could develop an informal investing plan (also referred to as an investment plan ) instead. Whether it is called a policy or a plan, the idea is that you have a clear understanding of managing your investment goals and objectives. 
The Bogleheads forum often gets questions such as "I have $50K saved up and I need to know which funds to put it in!". Setting up an investing plan will help answer these questions.
An investing plan can be as easy as following these simple steps:
- Step 1 - Formulate your goals. Be as specific as possible, realizing that you will make changes as the years go by.
- Step 2 - Set up a plan for each goal. The plan consists of identifying what type of account you will use to save the money, choosing the amount you will put toward the goal each year, working out an asset allocation likely to reach the goal with the minimum risk necessary, and identifying a plan B for the goal in case the returns you are planning on do not materialize.
- Step 3 - Select the best (usually lowest cost) investments to fulfill your desired asset allocation. Using all or mostly index funds further simplifies the process.
Some typical goals that can benefit from an investing plan:
- I want $40,000 for home downpayment by June 30, 2030
- I want to have enough money to pay the tuition at my alma mater in 13 years when my 5 year old turns 18
- I want to have $2 million saved for retirement by Jan 1 2050
For a detailed discussion on how to achieve those goals, see Bogleheads forum topic: "EmergDoc's Investing Plan Thread" .
- Retirement policy statement , a similar document intended for retirement planning
- ↑ Taylor Larimore (September 18, 2006). "Diehard Sunny Sarkar's beautiful IPS" . Retrieved June 5, 2023 .
- ↑ Bogleheads forum topic: "EmergDoc's Investing Plan Thread"
- Bogleheads forum topic: "Collective thoughts" , approach and methodology for investment policies.
- Bogleheads forum topic: "Forum Poll: Do you have a written investment plan?" , recommended reading .
- Bogleheads forum topic: "Post your Investment Policy Statement IPS here" , additional examples.
- Bogleheads forum topic: "White Coat Investor's Investing Plan Thread"
- Creating Your Investment Policy Statement , Sue Stevens, CNN Money, April 2, 2001.
- How to Create an Investment Policy Statement , Christine Benz, Morningstar, June 8, 2017. Archived from the original on September 27, 2020. Includes a downloadable investment policy template for creating your own statement.
- Asset allocation
- Investment management
National Coverage Local Professionals
Investment Policy Statements: What It Is and How To Write One
When you engage with a financial advisor, you are beginning the journey toward financial independence. Your advisor can provide effective investment counsel to help you prioritize a variety of financial matters and concerns, along with addressing the bottom line of your investments performance. For this purpose, a financial advisor prepares an investment strategy aligned with your overall financial plan, short-term and long-term objectives, risk appetite, and investment preferences. However, it can be difficult for the professional to accommodate all these factors in an investment strategy unless you document it and specify all parameters in detail.
One smart way to help guide your financial advisor is by creating an investment policy statement (IPS). The IPS functions as a strategic guide to the planning and implementation of an investment program. If crafted and implemented properly, the IPS can help you and your financial advisor appropriately plan your asset allocation, monitor the results, govern the investment portfolio, manage investment risks, and ultimately achieve the set targets for growth. The IPS can also be used to establish accountability of the financial advisor. Most importantly, an IPS serves as a guiding document for a financial advisor directing the professional on the objective course of action to be followed in the case of market disruption, especially when your emotions and instincts might lead you toward less prudent actions. An IPS is a customized document uniquely tailored as per your preferences, goals, attitude, and financial situation. It explicitly lists down factors that are highly relevant to your investment concerns. When you are writing an investment policy statement, you should ensure that the document is comprehensive, enabling your financial advisor to thoroughly understand your objectives, restrictions, tolerances, and preferences.
Here is everything you need to know about an IPS and how to write one:
What is an Investment Policy Statemnt?
As per the investment policy statement definition, an IPS is a document between you and your financial advisor that outlines the general investment rules for your advisor. The IPS contains your investment goals and objectives and lays down the strategies that the financial advisor should employ to meet these objectives. The individual investment policy statement also includes details about your asset allocation, risk tolerance, and liquidity requirements. Overall, the IPS acts as a roadmap for your financial advisor, offering precise guidance for the investments they make on your behalf.
A well-written IPS enables you and your advisor to stay focused on the short-term and long-term objectives.
Why do you need to create an Investment Policy Statement?
There are several benefits of creating an investment policy statement. Comprehensive investment plans can deliver better performance. Investment decisions based on emotions and instinct often cause a disaster for your investment portfolio. So, the goal of an IPS is to provide a clear road map for you and your financial advisor, guiding you through regular investment decisions as you move forward in your professional association. An individual investment policy statement is a comprehensive guide to your financial future. It helps you and your advisor stay committed to your long-term investment strategy. Without the presence of an IPS, your investment decisions could be focused only on the short-term or chase near-term performance. This approach might generate some short-term success, but ignoring long-term goals can prove to be detrimental to your financial security in the long term.
An IPS functions hand-in-hand with your long-term financial goals. By writing an investment policy statement, you are helping ensure that you and your financial advisor remain focused on achieving the right goals.
What does an individual Investment Policy Statement contain?
As mentioned, an IPS is a customized document created as per your unique investment directives. However, generally, the IPS contains two distinct sections:
- Financial goals and related investment strategy
- Assistance needed for the financial advisor
When you set to define your goals and investment strategy, you should ideally give an all-encompassing view to the financial advisor by listing down these factors:
- Investment objective: The purpose for investing should be mentioned. Whether it is for growing wealth, creating a retirement nest egg, establishing a secondary source of income, minimizing tax, buying a home, sponsoring your child’s education, or any other reason, the IPS should have it all.
- Time horizon: Another key determinant that impacts your investment is your investment period. This means how sooner or later you want to achieve the goals mentioned in the IPS. The investment horizon significantly influences the choice of assets and also impacts the returns of your portfolio. For instance, if you want to buy a home in the next two years, your investment portfolio should comprise more market-linked investment options. Inversely, if you want to buy a home, but not for another ten years, and have a low-risk appetite, investing in debt-based assets might be a preferential choice.
- Risk tolerance: The most critical component of your IPS is your risk appetite. Your risk tolerance typically governs the choice and allocation of assets. For instance, if you are a high-risk investor, you would want your financial advisor to allocate a higher percentage of your assets in equity. Whereas, if you are a risk-averse investor, you would prefer your advisor to take the safe route and allocate your assets in secure options, such as bonds, mutual funds, real estate, etc. You can also define the specific percentage of your asset allocation across bonds, stocks, real estate, mutual funds, cash holdings, etc.
- Investment preferences: Your investment preferences impact the selection and management of your portfolio securities. As an investor, if you prefer a more actively managed portfolio, the financial advisor will make investment decisions accordingly. In a passively managed portfolio, the fund only follows a specific market index. If you have preferences like investing in environment-friendly companies, social impact investing, or some specific sub-asset classes, etc., you can lay down the directives in your IPS. It is good to mention preferences for particular investments, like small-cap or mid-cap equities, precious metals, REITs (real estate investment trusts), target-date funds, etc.
Apart from these factors, other sections or topics you might want to include in the IPS are emergency fund strategy, drawdown strategy, and other considerations.
In the second part of the IPS, you mention the role you expect your financial advisor to play in helping you achieve the above-listed goals. For this purpose, you should be careful to include the following parameters in your IPS:
- Role of the financial advisor: This will include everything you expect your financial advisor to do for your investment goals. Right from understanding your financial goals, investment preferences to selecting the right securities and monitoring the portfolio, your IPS will list the duties and responsibilities of your financial advisor. You can also specify how often and through which medium you expect to receive updates on your investment performance. The IPS can state if you require your financial advisor to suggest recommendations to alter your investment strategies in situations of market disruption or when you fail to achieve your financial objectives.
- Monitor the investments: The IPS will assign the responsibility for monitoring and reporting. It will also mention who is responsible for determining investment policy, executing the transactions, monitoring the results of the decisions, and more. You could also describe the complete process of reviewing, monitoring, and reporting.
You can start simple and eventually update your IPS along with your financial advisor to make it a fully comprehensive document for your investment goals. At a minimum, you should review your IPS every year and see if you need to make any alterations. You should change your IPS when:
- There have been meaningful changes in your investment goals and life stage since the last IPS update.
- You plan to make alterations to your asset allocation or investment preferences in the next 12 months.
- Your current investment portfolio does not match the asset allocation as documented in your IPS.
That said, it is not wise to make changes to an individual investment policy statement concerning the state of the economy or the market volatility. The IPS should ideally only be reconsidered if there has been a change in the financial needs/goals, investment preferences, risk tolerance, or time horizon.
What is the process of writing an Investment Policy Statement?
Creating an investment policy statement is not a difficult task, provided you have a clear understanding of your financial situation and goals, risk preferences, time horizon, and investment preferences. You can follow these steps to write your individual investment policy statement:
- Talk to your financial advisor: Before you begin writing an investment policy statement, sit down and talk to your financial advisor to check if there are any internal guidelines or a particular format to follow when creating an investment policy statement. You can ask your advisor to walk you through the process. Be open and ask questions about financial terms, concepts, investing strategies, etc., that you do not understand. Assess if their IPS process and format of writing an investment policy statement align with your goals. If yes, you can use their IPS format and make alterations accordingly. If their IPS format does not match your needs, feel free to create your individual investment policy statement.
- Define your financial goals: The first thing you should mention in your IPS are your financial goals. Your purpose for investing should be defined. Mention your goals along with a timeline for achieving them. Your goal could be to create a retirement corpus, grow your wealth, sponsor the higher education of your child, buy a home, buy real estate, etc. Each goal that you list should have a timeline. Your goals can be short-term or long-term. For instance, buying a house can be your short-term goal, whereas creating a retirement fund can be your long-term objective. Once you know your goals and their timelines, you must list them in the order of their priorities. Consider this investment policy statement example – the IPS specifies that you want to create a portfolio that generates dividends, interest, and rental income of $10,000 per month before tax until you turn 65. Post the age of 65, you plan to retire and use the corpus created along with Social Security benefits as your income during retirement.
- Specify your risk tolerance: When creating an investment policy statement be clear about your risk tolerance. Risk appetite is unique for every investor and also changes over time. In the IPS, be sure to mention your general investment philosophy and the level of risk exposure your investment portfolio should have. Depending on your risk tolerance, your returns can be positive or negative over time. Typically, define the investment risk in terms of liquidity, legal, political, longevity, mortality, and business risk. To make the IPS holistic, you can include thresholds that define absolute loss. You can additionally list strategies to minimize the risk of further loss to avoid complete loss of investment. Consider this investment policy statement example - you do not want to achieve high returns in a short period. You prefer the security of principal and moderate returns that give you the peace of mind that your money is safe. This philosophy tells your advisor that you have a low-risk tolerance.
- Set asset allocation limits: Your individual investment policy statement should also define the allocation limit for different assets in your investment portfolio. You can specify the specific percentage for each asset class, such as equity, debt, and balanced funds in your portfolio. For instance, if you prefer to invest heavily in equity, you can allocate 80% of your assets in equity and 20% in bonds or other securities. You can also define if the asset allocation percentage should change specific to some conditions. Do mention if you prefer investing in real estate or REITs. As an average investor, you should keep 30-50% of your holdings in high-quality, blue-chip stocks that pay high dividends, along with 10% in cash and cash holdings and some percentage in real estate assets or other securities.
- Explain your investing preferences and strategy: After defining each of the above parameters, specify any investing preferences. For instance, if you want to invest in environment-friendly companies or opt for large-cap shares, etc. Define your investment strategy and your portfolio management - active or passive. Moreover, mention how aggressive or passive your investment strategy should be and any requirements for liquidity, emergency corpus, and related issues like a drawdown strategy. It is also good to disclose all your existing investments, such as your retirement accounts, cash reserves, real estate, etc. This will help the advisor know your future investment needs, investment preferences, current net worth, etc.
- Establish the rules of portfolio management: In this step, set the metrics that will help them monitor your investment portfolio in terms of risk and rewards. Define the assessment process to make meaningful comparisons over time and if there are any performance benchmarks or metrics/frameworks to be considered. Some deviations that can help you analyze performance and risk include standard deviation, Sharpe ratio, R squared, beta, etc. Write about how diversified your portfolio should be and the timeline for asset rebalancing. Be sure to mention the timing along with fixing an acceptable range for asset deviation. In some of the cases, you can also highlight the maximum level of cost for your portfolio.
- Define the role and responsibilities of the advisor: The last section of your IPS is where you clearly describe what you want your financial advisor to do for your portfolio. You can ask your advisor to identify securities, conduct risk assessment, execute the transaction, monitor the assets, balance the portfolio, manage the investment basket, etc. You can also mention the degree of control and flexibility the advisor has over the investment decisions. Be open about any dos and don’ts when managing your portfolio. Also, state if you need annual, monthly, or quarterly reports, as well as your preferred mode and frequency of communication.
After creating an investment policy statement, sign and date the document to make yourself and your advisor accountable. Revisit the IPS periodically to check if you are still on track.
The IPS is like a business plan for your portfolio. This critical document helps you ensure that you stay on track with your financial plan and achieve your goals. You can create your IPS yourself or consult a professional financial advisor and design a comprehensive IPS together.
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How to Write an Investing Plan
Don’t skimp out on creating an investment plan for yourself. Set your financial goals now to help you invest your money in the future.
Every lawyer, law student, professional and investor needs an Investment Policy Statement.
Investment Policy Statements don’t have to be long or complicated. In my opinion, some of the best Investment Policy Statements are less than two pages.
Remember back in law school when the Torts professor allowed you to bring one page of notes into the final exam? That’s exactly how your IPS should look. It contains only the essential facts. It’s everything you need to know about your financial life and where you’re going.
There are several benefits to having an Investment Policy Statement.
First, it’s the one document to answer all of your investing questions. By far, the most common post you’ll see on financial forums runs something like this, “I have $50K sitting in cash in my bank account, how should I invest it?”
The only reasonable answer is: Invest it according to your Investment Policy Statement.
There are too many circumstances specific to you for there to be one universal answer as to how you should invest your money, most of which would never be disclosed on an internet forum anyway.
That’s because an IPS is a rather personal document. It contains your values. You write down what you’re hoping to achieve with your (financial) life. It contains a lot of things most people aren’t comfortable sharing with just anyone.
For those reasons, it’s something you need to figure out. Whether you take the time to write it down or not, you’ll be grappling with the questions in life anyway, so you might as well write it down.
Second, it will keep you on the straight and narrow . You’re a high achiever. You’ve worked hard to get where you are and now you’re reading a personal finance blog directed at lawyers. I know your type. In a couple of years you’re going to still be thinking about this stuff and you’ll come across the latest trend in personal finance (peer-to-peer lending, robo-advisors, etc.) Should you invest? Your Investment Policy Statement will guide you. It will remind you of your goals and objectives and the best way to accomplish them.
Third, especially if you work with a financial advisor, your IPS will ensure that the advisor and you are working together to invest your money in a way that’s consistent with your goals. This applies to couples as well, which can benefit from having an IPS to confirm that they’re “on the same page” when it comes to finances.
I strongly believe that those investors that take the time write out an IPS are far less likely to make serious investment errors.
Luckily, your IPS only needs a few things:
- Investment choices to achieve those goals
- Cheat Sheet with Tax/Insurance information
Investment Policy Statement Template
No plan? No problem. You can start with the same template I used many years ago to create my Investment Policy Statement. It's a simple document that will get you started on achieving your goals. My favorite part is how it acts as a cheat sheet of all your insurance and tax information.
Get The Template
The first page functions as an executive summary. There are two important parts. First, there’s a simple reminder that I believe in the simple approach to investing. I want to buy-and-hold, get the market return and minimize fees and taxes. Second, I’ve listed objectives in order of priority .
The second page contains a summary of accounts, contribution limits and various saving goals.
The third page contains an asset allocation :
And finally, the fourth page has your insurance coverage details:
As you can see, you could easily consolidate this to two pages if you want. But I like the simplicity of having each page contain a theme.
Precedent investment policy statements
Because I know lawyers like templates (we call them precedent), I’ve collected quite a few examples you can click through and use when making your own. Don’t worry – I’m just as lazy as you are and would never try to draft from scratch.
- Biglaw Investor’s Investment Policy Statement
Some from around the web:
- Morningstar’s Investment Policy Worksheet
A few from the Bogleheads:
- Sunny’s Investment Policy Statement (Compact and Concise)
- Peter’s Investment Policy Statement (Company and Concise)
- White Coat Investor’s Investment Policy Statement
- Dale’s Investment Policy Statement (Comprehensive)
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Personal Capital keeping track of his money. He's also exploring real estate crowdfunding platforms like Fundrise which are open to both accredited and non-accredited investors.
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Six thoughts on How to Write an Investing Plan
Our asset allocation is similar, I’m at about 75% in domestic equities and 25% in international equities for my 401k. You and I are both younger, and stocks should be our main vehicle for building long term wealth.
Can an Investment Policy Statement include real estate?
Sure, the IPS is just a place where you write it down so you can refer to it easily. You can keep real estate, P2P, individual stocks in your “play” money account, whatever you think should be there.
Glad to see you’re in international equities. I think ignoring them is a form of recency bias given the fact that they haven’t performed very well recently.
One of the most important plans you can ever create. It’s not really for the times when everything goes right, then it’s easy to follow your plan. It’s for when the wheels come off the bus so to speak. With the market tanked fifty percent how do you force yourself to stay the course? Looking at this document and reminding yourself you planned for this.
That’s a sharp looking IPS BLI. Very well organized. Puts mine to shame, really.
Speaking of mine, it’s been nearly a year since I published it. Time for a review, revision, and an update!
Wow have you got your future dialled in BLI 🙂 I am very impressed with the level of detail and thoroughness. For those that aren’t ready to dig as deep it still shows the importance of digging in t making a simple list of goals. The process of writing it down and thinking about it helps you visualize the path to success and increases your odds of doing just that.
Wow, this is mind blowing. I have never even thought of this idea. It really can help to keep one on track – and help to guide them on the way to financial freedom. Thanks for this article.
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Investors in Mind and Money
Mind, Well-being, Wealth
How to Write an Investment Policy Statement?
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Happy New Year! Many have new year resolutions from losing weight to learning a new language to making lifestyle changes. How about a resolution for your financial success by writing an investment policy statement (IPS)?
Do you have an investment policy statement? If not, you should consider writing one. Because it will lay the groundwork for your financial success. In fact, think of your Investment Policy Statement as your “ long term view ” of your financial success. Mostly, your investment policy statement should consist of your ideas and decision making process that helps you reach your financial goals.
Investment Policy Statement
Investment Policy Statement generally comprises three broader areas: investment goals, investment strategy and investment monitoring.
1. Investment Goal
The first step in writing an investment policy statement is to set your financial goal. One of the most common long-term goals is to accumulate enough to retire comfortably. If you google “how much retirement income do I need?”, the most common answer would be 75% to 80% of your yearly pre-retirement income.
However, the answer certainly depends on what kind of lifestyle do you want now or 10, 20, 30 years from now? Do you want to splurge now while you are young and not wait until your retirement? Do you want to sustain your current lifestyle and carry it through your retirement? Do you want to spend more than your current lifestyle in retirement? Answers to these questions will determine how much wealth you need to build. There are quite a few online tools that can help you with this such as this Retirement Income Calculator from Vanguard.
2. Investment Strategy
The second step in writing an investment policy statement is to define your investment strategy to support your investment goals. In nutshell, this section answers questions like: how much to invest, where to allocate your investment, how much risk are you willing to take with your investment?
While the savings rate varies with your income level and your lifestyle, it is a good idea to invest 15% to 20% of your gross income if you can. It may not look like much in the beginning, but with consistent investing and compounding interest, your investment account could potentially grow into multi-million dollars over a few decades .
Where to allocate your savings depends on your age, your income level and most importantly your risk tolerance . Are you risk averse? What have you done with your investment in past bear markets? How did you handle paper loss of 30%? If you are not sure, review Vanagurd’s Portfolio Allocation Models to get started.
Besides investment another important question to ask is: Do you need an emergency fund to cover unpredictable expenses? This is particularly important during the early accumulation phase. Because if you had unexpected expenses, the emergency fund will prevent you from derailing your financial stability.
How much in an emergency fund is enough? While it depends on your lifestyle, current savings, and job stability, the general rule of thumb is to allocate at least three to six months of expenses. Ensure that the emergency fund is liquid and is easily accessible. The best place for an emergency fund would be an interest-bearing checking or savings account. However, you should not invest in an emergency fund in a mutual fund or bond fund.
3. Investment Monitoring
The third step in writing an investment policy statement is to define how you are going to monitor your investment portfolio.
- Would you review it quarterly, twice a year or every year?
- Do you reinvest dividends and interest income or let it accumulate or use the income to cover expenses.
- Would you rebalance on frequency or when your target allocation is off?
There are various rebalancing “rules”. One of the common rules is the “5/25” rule. According to this rule, you rebalance your investment if it deviates either 25% or an absolute 5 percent from its target allocation, whichever is less. For example, let’s say that your allocation is 60% Stock Fund / 40% Bond Fund. Due to the bear market, your allocation is now 55% Stock Fund / 45% Bond Fund. So you will “rebalance” your portfolio by selling 5% of the bond fund and buying the stock fund.
I know it is a lot to think about; however, this will be one of the most critical document for your financial success.
Investment Policy Statement Triggers
An Investment Policy Statement may need to be updated time-to-time. Here are some of the items that would trigger a change to Investment Policy Statement.
- Change in target allocation
- Introduction of a new asset class
- Significant withdrawal from investment portfolio
- Changes to savings rate
- Changes to risk tolerance
After you create an investment policy statement, I suggest reviewing it once a year to make any necessary adjustment. In fact, you may not have to make any adjustments to your investment policy for several years.
There you have it. If you have not created an investment policy statement, consider writing one today!
Here is an example to get you started!
Investment Policy Statement: An Example
Accumulate at least XX times our pre-retirement living expenses by the time we retire at age 65.
Replace 100% of current living expenses through savings and investment by XX age.
- Invest at least 25% of our gross income.
- US Market: 50%
- International Market: 20%
- Fixed Income Investment: 20%
- Alternate Investment: 10%
- Invest in broadly diversified index funds
- No more than 10% of the US equity market portfolio to a small cap index fund
- No more than 10% of the total portfolio in alternative investments such as real estate, private equity, and any other type of illiquid investments.
- The majority of the bond allocation to US Treasury Bond funds
- No more than 10% of the total bond portfolio in a Municipal Bond Fund (in a taxable account)
- We will review our investment portfolio on a yearly basis.
- Rebalance: Once a year on my birthday. We will rebalance equity investment or bond investment if it deviates either 25% or an absolute 5 percent from its target allocation, whichever is less.
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The US and China may be ending an agreement on science and technology cooperation − a policy expert explains what this means for research
Professor of Public Affairs, The Ohio State University
Caroline Wagner does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
The Ohio State University provides funding as a founding partner of The Conversation US.
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A decades-old science and technology cooperative agreement between the United States and China expires on Aug. 27, 2023. On the surface, an expiring diplomatic agreement may not seem significant. But unless it’s renewed, the quiet end to a cooperative era may have consequences for scientific research and technological innovation.
The possible lapse comes after U.S. Rep. Mike Gallagher, R-Wis., led a congressional group warning the U.S. State Department in July 2023 to beware of cooperation with China. This group recommended to let the agreement expire without renewal, claiming China has gained a military advantage through its scientific and technological ties with the U.S.
The State Department has dragged its feet on renewing the agreement, only requesting an extension at the last moment to “ amend and strengthen ” the agreement.
The U.S. is an active international research collaborator, and since 2011 China has been its top scientific partner , displacing the United Kingdom, which had been the U.S.‘s most frequent collaborator for decades. China’s domestic research and development spending is closing in on parity with that of the United States. Its scholastic output is growing in both number and quality . According to recent studies, China’s science is becoming increasingly creative , breaking new ground.
As a policy analyst and public affairs professor , I research international collaboration in science and technology and its implications for public policy. Relations between countries are often enhanced by negotiating and signing agreements, and this agreement is no different. The U.S.’s science and technology agreement with China successfully built joint research projects and shared research centers between the two nations.
U.S. scientists can typically work with foreign counterparts without a political agreement. Most aren’t even aware of diplomatic agreements, which are signed long after researchers have worked together. But this is not the case with China, where the 1979 agreement became a prerequisite for and the initiator of cooperation.
A 40-year diplomatic investment
The U.S.-China science and technology agreement was part of a historic opening of relations between the two countries, following decades of antagonism and estrangement. U.S. President Richard Nixon set in motion the process of normalizing relations with China in the early 1970s. President Jimmy Carter continued to seek an improved relationship with China.
China had announced reforms, modernizations and a global opening after an intense period of isolation from the time of the Cultural Revolution from the late 1950s until the early 1970s. Among its “ four modernizations ” was science and technology, in addition to agriculture, defense and industry.
While China is historically known for inventing gunpowder , paper and the compass , China was not a scientific power in the 1970s. American and Chinese diplomats viewed science as a low-conflict activity, comparable to cultural exchange. They figured starting with a nonthreatening scientific agreement could pave the way for later discussions on more politically sensitive issues.
On July 28, 1979, Carter and Chinese Premier Deng Xiaoping signed an “ umbrella agreement ” that contained a general statement of intent to cooperate in science and technology, with specifics to be worked out later.
In the years that followed, China’s economy flourished , as did its scientific output. As China’s economy expanded, so did its investment in domestic research and development. This all boosted China’s ability to collaborate in science – aiding their own economy.
Early collaboration under the 1979 umbrella agreement was mostly symbolic and based upon information exchange, but substantive collaborations grew over time.
A major early achievement came when the two countries published research showing mothers could ingest folic acid to prevent birth defects like spina bifida in developing embryos. Other successful partnerships developed renewable energy , rapid diagnostic tests for the SARS virus and a solar-driven method for producing hydrogen fuel .
Joint projects then began to emerge independent of government agreements or aid . Researchers linked up around common interests – this is how nation-to-nation scientific collaboration thrives.
Many of these projects were initiated by Chinese Americans or Chinese nationals working in the United States who cooperated with researchers back home. In the earliest days of the COVID-19 pandemic, these strong ties led to rapid, increased Chinese-U.S. cooperation in response to the crisis.
Time of conflict
Throughout the 2000s and 2010s, scientific collaboration between the two countries increased dramatically – joint research projects expanded, visiting students in science and engineering skyrocketed in number and collaborative publications received more recognition.
As China’s economy and technological success grew, however, U.S. government agencies and Congress began to scrutinize the agreement and its output. Chinese know-how began to build military strength and, with China’s military and political influence growing, they worried about intellectual property theft, trade secret violations and national security vulnerabilities coming from connections with the U.S.
Recent U.S. legislation, such as the CHIPS and Science Act , is a direct response to China’s stunning expansion. Through the CHIPS and Science Act , the U.S. will boost its semiconductor industry , seen as the platform for building future industries, while seeking to limit China’s access to advances in AI and electronics .
A victim of success?
Some politicians believe this bilateral science and technology agreement, negotiated in the 1970s as the least contentious form of cooperation – and one renewed many times – may now threaten the United States’ dominance in science and technology. As political and military tensions grow, both countries are wary of renewal of the agreement, even as China has signed similar agreements with over 100 nations.
The United States is stuck in a world that no longer exists – one where it dominates science and technology . China now leads the world in research publications recognized as high quality work , and it produces many more engineers than the U.S . By all measures, China’s research spending is soaring .
Even if the recent extension results in a renegotiated agreement, the U.S. has signaled to China a reluctance to cooperate. Since 2018, joint publications have dropped in number . Chinese researchers are less willing to come to the U.S. Meanwhile, Chinese researchers who are in the U.S. are increasingly likely to return home taking valuable knowledge with them.
The U.S. risks being cut off from top know-how as China forges ahead. Perhaps looking at science as a globally shared resource could help both parties craft a truly “win-win” agreement.
- International relations
- Science policy
- International affairs
- Technology policy