What Is an Investment Policy Statement (IPS)?
Quick Answer
An Investment Policy Statement (IPS) is a written document that outlines your investment goals, risk tolerance, time horizon, and the guidelines you'll follow when managing your portfolio. It serves as a personal rulebook that helps you make consistent decisions and avoid emotional reactions to market swings. Even a simple one-page IPS can provide valuable clarity.
What Goes in an IPS?
A typical IPS includes: (1) Investment objectives—what you're investing for and target returns. (2) Time horizon—when you'll need the money. (3) Risk tolerance—how much volatility you can accept. (4) Asset allocation targets—your planned mix of stocks, bonds, and other assets. (5) Rebalancing rules—when and how you'll adjust. (6) Constraints—any restrictions like ethical screens or liquidity needs.
Why an IPS Matters
Markets are emotional. When stocks crash, fear pushes people to sell. When stocks soar, greed pushes people to chase returns. An IPS written during calm times provides a rational anchor. It's your pre-commitment to a strategy, helping you avoid costly behavioral mistakes that typically hurt long-term returns.
Creating Your Own IPS
You don't need a fancy document. Start with these questions: What am I investing for? When will I need this money? How would I react to a 30% portfolio drop? What mix of stocks and bonds fits my situation? When will I rebalance? Write down your answers—that's the foundation of your IPS.
When to Update Your IPS
Review your IPS annually or when major life changes occur: new job, marriage, children, approaching retirement, or significant inheritance. Your goals and risk tolerance can shift over time. However, don't update it in response to market movements—that defeats the purpose of having predetermined rules.
IPS for Different Investors
Institutional investors (pension funds, endowments) have detailed IPS documents. Individual investors benefit from simpler versions. Even just writing "I will invest 80% stocks/20% bonds and rebalance annually, regardless of market conditions" gives you something to refer back to during turbulent times.
Frequently Asked Questions
Do I really need an IPS?
It's not required, but it's highly beneficial. Studies show that investors who follow written plans tend to make fewer emotional mistakes. Even a simple one-paragraph statement of your strategy can help you stay the course.
How detailed should my IPS be?
As detailed as is useful for you. A one-page summary covering goals, allocation, and rebalancing rules is enough for most individual investors. The key is having something written that you can refer to during market stress.
Should I share my IPS with anyone?
If you work with a financial advisor, your IPS should be a collaborative document. For DIY investors, sharing with a spouse or accountability partner can help you stick to your plan. It's also useful for estate planning purposes.
What if my IPS isn't working?
If your situation has genuinely changed (new goals, different timeline, changed risk tolerance), update your IPS thoughtfully. If you're just frustrated with short-term performance, that's usually a reason to stick with your plan, not abandon it.
Can your tool help me create an IPS?
Yes. During the portfolio analysis process, you answer questions about your goals, timeline, and risk tolerance. These responses form the foundation of a simple IPS that's included in your analysis report.
Educational Only / Not Investment Advice: This content is for educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any securities. Investment decisions should be based on your individual circumstances and made in consultation with a qualified financial professional. Past performance does not guarantee future results.
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