Investment policy statement

An investment policy statement (IPS) is a written document that serves to guide investment decisions.. The idea is to to put down on paper your investment goals and timelines and how you will get there. It spells out how you will measure how you are doing and how often you will review how you are doing.

An IPS can be simple or more complex, depending on its intended use. For an investor working with a financial advisor, it's a document that defines investment needs, 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.

For an individual do-it-yourself (DIY) investor, the IPS is a short document of a page or so, written in plain English. It can define the investor's investment philosophy, the portfolio's asset allocation, its product selection, and other considerations. It is useful to both the investor himself for investing discipline and to others who will take care of the portfolio after the investor becomes unable to do it. Keep it as simple as possible so that you'll be able to be guided by what you have written.

You will then want to periodically re-read it again to avoid behavioural pitfalls when you are not feeling so calm, for example because of market turbulence. Having an IPS will help you "Stay the course".

For investors challenged by the complexity of an IPS or when the investment objectives don't justify the effort needed to create an IPS, the investor may consider the use of a simple Investing plan. This article starts with describing a simple Investing plan and then presents the full IPS.

Industry use versus DIY

Industry use

In the investment counsel industry, an IPS is a document, between a client (institution or individual investor) and a manager, recording the agreements the two parties come to with regards to issues relating to how the investor's money is to be managed. Use of an IPS with each client is considered a best practice for investment managers.

Do it yourself investors

In the context of DIY investing, the IPS can be seen as a contract between the investor and him/herself. An IPS exists to formalize and document the policy decisions on how your investment portfolio will be operated. It should also consider others who will take care of the portfolio after the investor becomes unable to do it.

Investing plan

Main articles: Investing plan for short term goals and Investment planning

In some circumstances, a prospective investor may have a relatively simple or short-term (say, 5 years or less) goal that does not require a full investment policy statement. In those cases, a relatively simple Investing Plan may suffice.

An investing plan can be as easy as following these simple steps:

1. Formulate your goals. Be specific.
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.
3. Select the best (usually lowest cost) investments to fulfill your desired asset allocation.
4. Rebalance the portfolio on a regular basis, typically every year on a specified date.

Benefits of using an IPS

In the following quote, Yogi Berra wasn't talking about investing but he could have been.

You've got to be very careful if you don't know where you're going, because you might not get there.
If you don't know where you are going, you will wind up somewhere else.

— Yogi Berra

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.

Elements of an IPS

When creating an investment policy statement there can be many elements to include. The following list, while not exhaustive, provides some of the major points to consider. It is up to the investor, depending on their circumstances and needs, to determine which of these elements to include in their IPS. Different investors include or exclude different elements depending on their circumstances and investment philosophy.

Current status

• Sources of income, information about dependents, where existing financial assets are located (institutions, types of accounts)
• Intended monthly contribution or withdrawal

Objectives and constraints, including time horizons, income needs and their timing, tax considerations

• Risk tolerance
• Investment philosophy (about risk, diversification, costs, taxes...)

Investment selection criteria

• Asset classes to be used and those to be avoided
• Target asset allocation between equities, fixed income and cash (if any), and split between domestic and foreign assets
• Whether to use a systematic investment plan
• Expected annualized return

Monitoring

• Rebalancing policy
• Tax loss harvesting policy, if applicable
• Monitoring and review policy, choice of benchmark for portfolio returns

Morningstar provides downloadable worksheets. Some investors might find such templates too restrictive. A more customized example is provided by Libra Investment for a hypothetical retired widow.

Considerations

Main article: Financial Management

A basic component of the planning process is to create a budget. This can be done with the aid of personal finance software or even a simple spreadsheet. Additional considerations:

• For retirement savings the tax-sheltered accounts available are a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). The latter can be used for any savings goal, including emergency funds.
• For educational purposes, a Registered Education Savings Plan (RESP) may be used
• In general, if funds are required in 5 years or less, equities (stocks) should not be used because of the risk of loss.

After retirement

Once the investor is retired, the IPS might become a Retirement policy statement.

See also

• Creating a financial plan
• Portfolio design and construction

Further reading

• Financial Wisdom Forum topic: "The One-Line Investment Policy Statement (IPS)"
• Financial Wisdom Forum topic: "Example of an IPS?"
• Financial Wisdom Forum topic: "When to revise an IPS"

External links

• Investment policy statement, from the Bogleheads Wiki
• Diehard Sunny Sarkar's beautiful IPS at the Wayback Machine (archived July 18, 2014), a short but concise example of an IPS
• "Investment Policy Statement". GetSmarterAboutMoney.ca.
• Craig Wong, The Canadian Press (December 10, 2015). "Why you should have an investment policy statement". MoneySense.ca.