Investment policy statement

An Investment Policy Statement (IPS) is a statement that defines general investment goals and objectives. It describes the strategies that will be used to meet these objectives and contains specific information on subjects such as asset allocation, risk tolerance, and liquidity requirements.

Benefits of using an IPS
Every investor could potentially benefit from having an investment policy statement. It provides the foundation for all future investment decisions to be made by an investor. It serves as a guidepost, identifies goals and creates a systematic review process. The IPS is intended to keep investors focused on their objectives during short-term swings in the market and provides a baseline from which to monitor investment performance of the 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. Any proposed changes to your investments can also be evaluated and reviewed against your overall objectives using your IPS.

A properly constructed Investment Policy Statement provides support for 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 who doesn't have a written policy often bases decisions on day-to-day events, which often leads to chasing short-term performance that may hinder them in reaching long-term goals. Having a policy encourages maintaining focus on the long-term nature of the investment process, especially during turbulent or exuberant times.

Financial account information

 * Where are your financial assets located?
 * How much is in tax-deferred accounts (IRA, 401(k), etc) versus taxable accounts?
 * How much will you be contributing to these accounts?

Investment objectives, time horizon, risk tolerance

 * Short-term financial goals and liquidity needs
 * Long-term financial goals and retirement
 * Time-frame for funding these goals
 * Length of time assets will be needed
 * Amount of assets to be needed

Asset classes to be used and those to be avoided

 * Asset classes I must include in my overall investment portfolio
 * U.S. Stocks
 * International Stocks
 * U.S. Bonds


 * Asset classes I would rather avoid due to excessive risk, high expenses, or large tax liabilities, etc.
 * 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 re-balancing ranges

 * Target allocation between stocks and bonds
 * Target allocation for international investments
 * Time-frame for altering these allocations
 * Minimum and maximum deviations from these targets that will trigger portfolio re-balancing

Monitoring and control procedures

 * Frequency of monitoring
 * Benchmark for comparison of portfolio returns
 * Acceptable deviation from benchmark (amount and time)
 * Concrete procedures for future changes to IPS
 * Financial reasons for changing IPS
 * Lifestyle reasons for changing IPS
 * Reasons not to change IPS (e.g. short-term market performance)

Real-World IPS
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.

Links

 * Creating Your Investment Policy Statement, Sue Stevens, Morningstar, 8-15-02.
 * Collective thoughts, forum discussion. Approach and methodology for investment policies. Recommended reading by forum members.