What’s an Investment Policy Statement and why do I need one?
IPS defined
An IPS documents financial goals and clearly states how they are going to be achieved.
I’m dismayed to meet people who have never defined their investment goals when they have had money invested with brokers in the past. Goals are critical for making you think about what you are trying to achieve, and they are indispensable for evaluating anyone you have hired to manage your investments. Goals should be reviewed annually and updated when required.
Example of an IPS based on a hypothetical invester
Overall objectives: Ability to retire at age 65 with the expectation of some reduced income afterwards. Retain the pre-retirement standard of living in retirement and never run out money. Allow for the death of one spouse and still meet this overall objective for the remaining spouse. Leaving money to beneficiaries is not a priority.
Approximate net worth (Current assets – current liabilities): $750,000.
Emergency fund: $30,000.
Assets under management: $400,000.
Anticipated investment time horizon: 25 years to retirement, 35 years in retirement (to age 100).
Overall portfolio desired return: annual inflation rate + 4%. A retirement calculation as to what amount would be needed at retirement has not been done, so this return may or may not be adequate for meeting retirement goals.
Risk tolerance: maximum paper loss of 25% in any given year. Note that losses are not incurred unless investments are actually sold.
Investment vehicles to be considered: stock and bond no load mutual funds and ETFs, both passively managed (index) and actively managed, BDCs (Business Development Companies).
Tactical asset allocation: 70%-80% stock mutual funds and ETFs, 20%-30% bond mutual funds and ETFs. Bond portfolios will vary in composition between Treasury bonds, mortgage bonds, corporate bonds, and foreign bonds.
Cost control considerations: No load mutual funds and other investment vehicles with low expense ratios. Excessive trading is discouraged.
Benchmark for portfolio evaluation: Vanguard total stock market (VTI) and total bond market (BND) ETFs.
Tax considerations: tax exempt securities will be considered for any accounts that are not tax-deferred.
Other pertinent information (e.g. needs for liquidity within specific time frames, anticipated medical expenses, estimated college expenses, etc.): None.
Monitoring and reporting frequency: Weekly monitoring and quarterly reporting, via email, of portfolio performance.
Investment Policy Statements should be reviewed annually and updated when required. You should have one if you work with a financial adviser, an investment adviser, a broker, or manage your own investments. If you don’t have one, insist on having one or find a different adviser.