Your Investment Policy Statement
Posted on Thursday, June 28, 2018
Managers of mutual funds and other pools of money always develop investment policy statements (IPS) that govern how portfolio decisions are made. Financial advisor and brokers also work with clients to define similar rules to aid in security selection and management.
Independent investors often overlook this step, but developing your own personal IPS can improve your portfolio risk and return. Adhering to a few policies can also curb impulse buying.
An investment policy statement typically includes details about targeted asset and sub-asset allocation; general risk tolerance; the time horizon of securities owned; minimum and maximum exposure to sectors, industries, or companies; and the investing strategy to be utilized in picking securities. It may also stipulate types of investments that should be avoided.
Investment policy statements are not meant to be modified due to market conditions or short-term issues, but may be adjusted for lifestyle changes (such as when children complete college or retirement becomes imminent). The IPS should address the reasons that it may be changed over time.
A simple search on the Internet can help you discover sample investment policy statements to use in defining your own. Even if you don’t create a full-blown IPS, having a few well-articulated rules of security selection and portfolio management jotted down on a piece of paper can lead the way towards improved investing discipline.
- DOUG GERLACH