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Creating an Investment Policy Statement

Businessman standing at his office desk pointing to a document

An investment policy statement (IPS) memorializes an investment plan and the underlying assumptions, while clearly delineating duties and responsibilities of all involved parties. The IPS creates the standards for investment decision making and helps mitigate behavioral bias. Adherence to an investment policy statement that employs principles of diversification and risk management can also help to protect the integrity of the assets during periods of stress against impacts from external variables including changes in personnel tasked with stewarding the assets. Below are areas of consideration to be included in an Investment Policy Statement.

Define the Investor and the Assets

It is of the utmost importance to clearly definie who the investor is, natural person or legal/corporate entity/trust and specify where your portfolio will be domiciled for tax purposes, along with identifying which assets are to be governed in the manner set forth within this statement.

Statement of Purpose/Identifying Goals

Your IPS should begin with a clear statement outlining the purpose and intent of your investments. Quantifying how much you may need to maintain your current lifestyle and anticipated future financial endeavors requires you to project such metrics as life expectancy and rate of investment return needed, as well as factors that may cause your spending to change and whether you have nonportfolio sources of income now or in the future. The primary notion is that this document is intended to establish a clear understanding of the needs, objectives and standards applicable to your overall portfolio.

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