What is an Investment Policy Statement (IPS)?
Submitted by Desmond Wealth Management, Inc. on November 9th, 2019
An Investment policy statement (IPS) is a statement that is a road map for you and your advisor in structuring your investments according to your goals. It spells out your investment goals and objectives, outlines the asset allocation targets, and the specific types of securities to be used with the expected risk/return profile of your portfolio. An IPS discusses income requirements, asset location considerations for minimizing income taxes, portfolio rebalancing, investment monitoring and control procedures that are important to the overall care and management of your portfolio assets.
Benefits of Using an IPS
Every investor could potentially benefit from having an investment policy statement. It provides the foundation for all future investment decisions to be made by an investor. It serves as a guidepost, identifies goals and creates a systematic review process. The IPS is intended to keep investors focused on their objectives during short-term swings in the market and provides a baseline from which to monitor investment performance of the overall portfolio, as well as the performance of individual fund managers. It outlines the ground rules of the relationship between you and your advisor. You can also use the IPS as a reference to see whether or not your portfolio is achieving your stated goals and objectives. Any proposed changes to your investments can be evaluated and reviewed against your overall objectives using your IPS.
A properly constructed Investment Policy Statement provides support for following a well-conceived, long-term investment discipline, rather than one that is based on false overconfidence or panic in reaction to short-term market fluctuations.
Drawbacks of Not Using an IPS
Someone who doesn't have a written policy often bases decisions on day-to-day events, which often leads to chasing short-term performance that may hinder them in reaching long-term goals. Having a policy encourages maintaining focus on the long-term nature of the investment process, especially during turbulent or exuberant times.
Basic Sections of an IPS
- Financial account information
- Investment objectives, time horizon, risk tolerance
- Asset classes to be used and those to be avoided
- Asset location and tax strategies
- Asset allocation targets and rebalancing ranges
- Cash management and allocation
- Monitoring and control procedures
Contact us to review your Investment Policy Statement. If you don't have one... more the reason to call.
