Investment Policy Statement

An Investment Policy Statement (IPS) is a written document that outlines your investment goals and the rules you will follow to achieve them. By defining your intentions and the boundaries for your decision-making, an IPS helps you stay disciplined, especially during times of market stress or uncertainty. The IPS is your personal financial roadmap, keeping your portfolio aligned with your long-term objectives rather than short-term emotions.

The key components of an IPS include:

• Investment goals: describe what you want to achieve, such as saving for retirement, buying a home, or building wealth;
• Risk tolerance: define how much risk you are willing and able to take, considering your time horizon and comfort with market ups and downs;
• Asset allocation: specify how you will divide your investments among asset classes like stocks, bonds, and cash;
• Rules for rebalancing: set guidelines for when and how you will adjust your portfolio to maintain your target asset allocation as markets move.

To see how this works in practice, imagine you are a new investor just starting out. You might draft a simple IPS like this:

"My goal is to save for retirement in 30 years. I am comfortable taking moderate risk and want to avoid large losses. I will invest 70% of my portfolio in a broad US stock index fund, 25% in a US bond index fund, and 5% in cash. I will rebalance my portfolio once a year if any asset class drifts more than 5% from its target allocation. I will review my IPS every two years or after any major life change."

Having this statement written down will help you stick to your plan and avoid making impulsive decisions during market swings.