What is an investment policy statement?

An investment policy statement (IPS) is a document that is signed between an investor and a financial adviser. It stipulates the general rules on how to manage the investor’s money.

The IPS usually outlines the client’s major investment goals and objectives. An investment policy statement specifies the strategies that the portfolio manager should implement to achieve the desired results.

An investment policy statement can also contain some specific client-related data, such as asset allocation, liquidity requirements and risk tolerance.

Where have you heard about investment policy statements?

Often, investment policy statements are used by financial and investment advisers to compile an investment plan for a client. The IPS usually serves as a roadmap for informed decision-making and a guide towards successful investing. It also saves a portfolio manager, as well as the investor, from potential trading mistakes.

What you need to know about investment policy statements.

An investment policy statement is a good idea not only for large investors and pension funds, but also for smaller individual investors. Drafting a detailed, thoughtful IPS will help you to set your investment strategies clearly and precisely and keep calm in the face of market volatility and emotional biases.

The biggest mistake of a trading newbie is getting emotionally attached to their investments. An investment policy statement may help you avoid behavioral biases and stick to your original investment plan. An IPS doesn’t let you deviate from your strategy due to emotions and volatile market conditions.

There are different forms of investment policy statements, and it’s up to the investor to decide how detailed this document should be. However, there are some key features that are usually outlined in the IPS.

• Investment objectives

Here, investors outline the purpose of their investment policy statement, share the goals they want to reach and the results they want to achieve. In particular, they state the timeframe and the amount of profit being targeted. It can be as detailed as you wish.

• Investment philosophy

This may include data about how much risk investors can tolerate. How do you feel about trading and its costs? An important part of the IPS, this can serve as your guide when choosing a particular asset to trade.

• Assets selection criteria

Investors usually specify which types of assets seem closer to their investment goals. This is where you decide whether you want to concentrate on individual stocks, commodities and bonds, or consider ETFs and mutual funds instead. What factors do you consider important when choosing an asset to invest in?

• Asset allocation

One of the most important parts of any investment portfolio is asset allocation. Remember that only 90% of your portfolio performance depends on how you've allocated your money. Having a diversified portfolio, where one asset's positive performance offsets a negative performance of another asset, will reduce the volatility of your portfolio and will bring you greater chances of success.

• Review

If you're not going to check your portfolio every single day, you should definitely specify your reviewing guidance to monitor your investments. Once you've decided when and how you will control and check the performance of your portfolio – on a monthly, quarterly or even annual basis – you may rebalance it at the same time.

An investment policy statement can be much more detailed. However, the main goal is not only to compile it, but to stick to it in order to achieve consistent results.