While there are a lot of tricky terms used in the world of investing, the concept behind the Investment Policy Statement should be fairly easy to understand. Simply put, the Investment Policy Statement (IPS) is a document that dictates how you invest your money. If you are working with a financial planner, the IPS will also dictate how that money manager invests your money on your behalf.
Here’s why creating this document is a good move: while your financial planner may make plenty of smart investing decisions on your behalf, it’s quite possible you want to have some say in how your money is invested and when. With an IPS in place, your financial planner can’t claim ignorance or go rogue when investing your money. The IPS tells them how, when, and where to invest so you can reach your financial goals on your own terms – even if you do utilize a professional’s help.
While Investment Policy Statements can look different based on the client, their portfolio, and their investing goals, details typically found on an IPS include:
- Your investment objective: do you want outright growth or minimization of risk?
- A declaration of investment timeline: how long do you plan to keep your money invested?
- Expected treatment of investment distributions: do you want to reinvest your money or take distributions for your yourself?
- Your desired asset allocation: how much of your money do you want in each type of investment?
Do Individual Investors Need an Investment Policy Statement?
Don’t think for a second that you don’t need an Investment Policy Statement if you’re a DIY (do-it-yourself) investor who doesn’t have a financial planner. Because individual investors may be more emotionally attached to their investments, most self-directed investors are in desperate need of a set of guiding principles to dictate how and where their money should be invested.
One reason Investment Policy Statements are so valuable is because these documents help investors stay the course. And, staying the course with your investing plan may be more important than you think, mostly because a wealth of academic research has shown that staying the course is what creates a successful investing experience.
If you learn anything from this article, please learn this: not making changes to your portfolio is critical to achieving your goals as an investor. An Investment Policy Statement can do just this: help you stick with your plan. Figure out an investment plan that suits your needs then stick with it for the long run, and you will be a lot better off.
How Can an Investment Policy Statement Help You Stay the Course?
At the end of the day, an Investment Policy Statement is very valuable in times of stock market uncertainty and stock market fads. As an example, consider how valuable it might have been to have an IPS during the internet bubble of last decade. An investor who did not have an Investment Policy Statement could have easily ended up investing all of their retirement money in soon-to-be-worthless internet stocks. However, the investor with an Investment Policy Statement would likely be prohibited from putting all their eggs in that now-defunct basket. Why? Because their IPS had already been created to limit risky investing and help them reach their long-term goals.
The bottom line: the job of a fee-only CERTIFIED FINANCIAL PLANNERTM professional is to ensure the financial success of their clients, by helping clients stay on track to reaching their financial goals. Maintaining a portfolio that is in line with a client’s goals and risk tolerance does just that. The Investment Policy Statement just takes everything a step further because it forces investors to put goals and investing strategies in writing.
If you’re someone who wants to stay the course so you can meet your financial goals in the future, I highly suggest sitting down to create an Investment Policy Statement. Do this whether you work with a financial planner or not. An IPS can serve as the voice of reason when you’re tempted to invest in risky, currently-trending (read: bubble) investments. If you’re able to create this document to rely on its wisdom for the long-term, you will have more money saved by the time you reach retirement.