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

Contents

• 1 Benefits of using an IPS
• 2 Drawbacks of not using an IPS
• 3 Basic sections of an IPS
  • 3.1 Financial account information
  • 3.2 Investment objectives, time horizon, and risk tolerance
  • 3.3 Asset classes to use and those to avoid
  • 3.4 Asset allocation targets and rebalancing ranges
  • 3.5 Monitoring and control procedures
  • 5.1 Other real-world examples
  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 long-term financial goals and retirement
    • 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

    • Asset classes you decide that you must include in your overall investment portfolio
      • U.S. Stocks
      • International Stocks
      • U.S. Bonds
      • 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

      • Your frequency of monitoring
      • Your benchmark for comparison of portfolio returns
      • The acceptable deviation from benchmark (amount and time)
      • Any concrete procedures for future changes to IPS, for example:
        • Financial reasons for changing IPS
        • Lifestyle reasons for changing IPS
        • Any reasons not to change IPS (for example, short-term market performance)
        Example IPS
        • Objective 1: To retire at the age of 57
        • Objective 2: To have an annual income from my investments of at least $45,000 after taxes and in today’s dollars (inflation assumed to be 3.0 percent yearly)
        • Objective 3: To leave a meaningful inheritance for my children
        • Objective 4: To minimize potential tax liabilities
        • Objective 5: To monitor portfolio allocation against holding limits, to benchmark returns against expectations, and to consider revisions to portfolio as personal situation may dictate
        • Large Cap U.S. Equities (15-30 percent)
        • Mid Cap U.S. Equities (10-25 percent)
        • Small Cap U.S. Equities (5-15 percent)
        • Foreign Equities (5-15 percent)
        • REITs (0-15 percent)
        • Inter-Term Govt Bonds (10-25 percent)
        • Corporate Bonds (0-10 percent)
        • Cash and Cash Equivalents (5-20 percent)
        • Large Cap U.S. Equities (25 percent)
        • Mid Cap U.S. Equities (10 percent)
        • Small Cap U.S. Equities (5 percent)
        • Foreign Equities (15 percent)
        • REITs (10 percent)
        • Inter-Term Govt Bonds (25 percent)
        • Corporate Bonds (5 percent)
        • Cash Equivalents (5 percent)
        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. [1]

        • VTSMX - Total Stock Market Fund 45% - Taxable account
        • VGTSX - Total Int'l Market Fund 15% - Roth IRA
        • VIPSX - TIPS Fund 20% - Traditional IRA
        • IIBAX - Intermediate Bond Fund 20% - 401k
        • VMMXX - Money Market fund (6 months' expenses) - Taxable account

        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"
        Investing plan

        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. [2]

        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" .

        1. ↑ For an interactive course on creating an investment policy statement, see: "Creating Your Investment Policy Statement". Morningstar's Investing Classroom . Retrieved June 5, 2023 .