Investment Policy Statement Template: A Guide for Novice Investors

26.5 Template for an Investment Policy Statement

An Investment Policy Statement (IPS) is a crucial document for any investor. It serves as a roadmap, guiding your investment decisions and ensuring that your portfolio aligns with your financial goals and risk tolerance. This section provides a comprehensive guide to creating an IPS, complete with a customizable template that you can adapt to your unique circumstances.

Understanding the Investment Policy Statement

An IPS is a written document that outlines the rules and guidelines for managing an investment portfolio. It includes your financial goals, investment objectives, risk tolerance, asset allocation strategy, and guidelines for monitoring and rebalancing. By clearly defining these elements, an IPS helps you make informed investment decisions and stay disciplined during market fluctuations.

Key Components of an Investment Policy Statement

1. Introduction and Purpose: Define the purpose of the IPS and its role in guiding your investment strategy.

2. Financial Goals: Clearly state your short-term and long-term financial objectives, including specific targets and timeframes.

3. Investment Objectives: Outline your desired return on investment and any constraints or preferences that will influence your investment decisions.

4. Risk Tolerance: Assess your willingness and ability to take on risk, considering factors such as your investment horizon, income stability, and emotional comfort with market volatility.

5. Asset Allocation Strategy: Detail your approach to diversifying your portfolio across different asset classes, such as equities, fixed income, and alternative investments.

6. Investment Selection Criteria: Specify the criteria for selecting individual investments, including considerations for diversification, liquidity, and cost.

7. Monitoring and Rebalancing: Establish guidelines for regularly reviewing your portfolio’s performance and making adjustments to maintain your desired asset allocation.

8. Roles and Responsibilities: Identify the individuals or entities responsible for implementing and managing the investment strategy.

9. Review and Revision Schedule: Set a schedule for reviewing and updating the IPS to ensure it remains relevant and aligned with your evolving financial goals.

Customizable Template for an Investment Policy Statement

Below is a customizable template that you can use to create your own IPS. Each section includes prompts and questions to guide your thinking and ensure that you cover all essential elements.

1. Introduction and Purpose

• Purpose of the IPS: Why are you creating this document? What do you hope to achieve by having a formal investment policy?

• Investment Philosophy: What are your core beliefs about investing? How do these beliefs influence your approach to managing your portfolio?

2. Financial Goals

• Short-Term Goals: What are your financial objectives for the next 1-5 years? Include specific targets and timeframes.

• Long-Term Goals: What are your financial objectives for the next 5-30 years? Include specific targets and timeframes.

• Prioritization: How do you prioritize your financial goals? Which goals are most important to you, and why?

3. Investment Objectives

• Target Return: What is your desired annual return on investment? How does this compare to historical market averages?

• Investment Constraints: Are there any constraints or preferences that will influence your investment decisions, such as ethical considerations or tax implications?

4. Risk Tolerance

• Risk Assessment: How would you describe your willingness to take on risk? Consider factors such as your investment horizon, income stability, and emotional comfort with market volatility.

• Risk Capacity: How much risk can you afford to take, given your financial situation and goals?

• Risk Management Strategies: What strategies will you use to manage risk in your portfolio, such as diversification or hedging?

5. Asset Allocation Strategy

• Target Asset Allocation: What is your desired allocation across different asset classes, such as equities, fixed income, and alternative investments?

• Rationale for Allocation: Why have you chosen this particular asset allocation? How does it align with your financial goals and risk tolerance?

• Rebalancing Guidelines: How often will you review and adjust your asset allocation to maintain your desired balance?

6. Investment Selection Criteria

• Selection Criteria: What criteria will you use to select individual investments, such as diversification, liquidity, and cost?

• Preferred Investment Vehicles: Do you have any preferences for specific types of investment vehicles, such as mutual funds, ETFs, or individual securities?

7. Monitoring and Rebalancing

• Performance Monitoring: How will you track the performance of your portfolio? What benchmarks will you use to evaluate success?

• Rebalancing Triggers: What events or conditions will prompt you to rebalance your portfolio, such as a significant change in market conditions or a deviation from your target asset allocation?

8. Roles and Responsibilities

• Investment Manager: Who is responsible for implementing and managing the investment strategy? This could be you, a financial advisor, or a third-party manager.

• Decision-Making Authority: Who has the authority to make investment decisions and changes to the IPS?

9. Review and Revision Schedule

• Review Frequency: How often will you review and update the IPS to ensure it remains relevant and aligned with your evolving financial goals?

• Revision Process: What process will you follow to make changes to the IPS, and who will be involved in this process?

Sample Investment Policy Statement

To help you visualize how an IPS might look in practice, here is a sample document that incorporates the elements outlined above. This sample is for illustrative purposes only and should be customized to fit your unique circumstances.

Sample Investment Policy Statement

Introduction and Purpose

The purpose of this Investment Policy Statement (IPS) is to establish a clear and comprehensive framework for managing my investment portfolio. This document outlines my financial goals, investment objectives, risk tolerance, asset allocation strategy, and guidelines for monitoring and rebalancing. By adhering to this IPS, I aim to achieve my financial objectives while managing risk effectively.

Financial Goals

• Short-Term Goals: Save $50,000 for a down payment on a home within the next 3 years.
• Long-Term Goals: Accumulate $1 million in retirement savings by age 65.

Investment Objectives

• Target Return: Achieve an average annual return of 7%.
• Investment Constraints: Avoid investments in industries that do not align with my ethical values.

Risk Tolerance

• Risk Assessment: Moderate risk tolerance, with a willingness to accept short-term volatility for long-term growth.
• Risk Capacity: Can afford to take on moderate risk, given a stable income and long investment horizon.

Asset Allocation Strategy

• Target Asset Allocation: 60% equities, 30% fixed income, 10% alternative investments.
• Rebalancing Guidelines: Review and adjust allocation quarterly to maintain target balance.

Investment Selection Criteria

• Selection Criteria: Prioritize low-cost, diversified investment vehicles with a strong track record of performance.
• Preferred Investment Vehicles: Index funds and ETFs.

Monitoring and Rebalancing

• Performance Monitoring: Track portfolio performance monthly against a benchmark of 60% S&P 500, 30% Bloomberg Barclays U.S. Aggregate Bond Index, and 10% HFRI Fund of Funds Composite Index.
• Rebalancing Triggers: Rebalance if any asset class deviates by more than 5% from the target allocation.

Roles and Responsibilities

• Investment Manager: Self-managed, with periodic consultations with a financial advisor.
• Decision-Making Authority: Sole authority to make investment decisions and changes to the IPS.

Review and Revision Schedule

• Review Frequency: Review and update the IPS annually.
• Revision Process: Consult with a financial advisor for input on any significant changes to the IPS.

References and Additional Resources

For further guidance on creating an IPS, consider reviewing sample documents and resources from reputable financial planning organizations and institutions. Some useful references include:

• The CFA Institute’s “Elements of an Investment Policy Statement for Individual Investors”
• The Financial Planning Association’s “Investment Policy Statement Guide”
• Sample IPS documents from major financial institutions, such as Vanguard and Fidelity

Conclusion

Creating an Investment Policy Statement is a vital step in managing your investment portfolio effectively. By clearly defining your financial goals, investment objectives, risk tolerance, and asset allocation strategy, you can make informed decisions and stay disciplined during market fluctuations. Use the template provided in this guide to create your own IPS, and review it regularly to ensure it remains aligned with your evolving financial goals.

Quiz Time!