How to Develop an Investment Policy Statement

by Linda Ray

An investment policy statement is a commitment that you make to follow a certain path with your investments and stick to the plan. Financial advisers typically form relationships based on the client’s investment policy statement, which directs them to invest in a certain manner. Businesses often develop an investment policy statement, or IPS, to manage retirement funds.

Conduct an audit of your portfolio to assess your current standing. The audit should provide you with an overview of your assets and investments so you can intelligently develop an investment policy to garner the best results.

Define the levels of investing you plan to undertake in the future. Decide how much you plan on contributing to your portfolio and how many years are left before you begin drawing from the accounts.

Determine how much money you will need in the future and how well you expect your investments to perform. Your monetary goals and your timeline will help determine the mix of investments you need to hold.

Express your level of risk. Whether you have a low tolerance for risk or favor bigger risks for bigger rewards, you must accept some level of risk when investing. Once you evaluate your own comfort level, you are ready to create your investment strategy.

Set rules to guide your investing decisions. Rules also may be used by your financial planner to follow your investment philosophy. Develop a set of rules based on the criteria that’s important to you. Consider, for example, how important it is that you have a diversified portfolio and how important are the costs of certain stocks. Your rules also are based on your goals. For example, you must decide whether you want to invest only in products that pay dividends or to carry more liquidity in your portfolio.

Establish a plan for monitoring your investments. The final piece of your investment policy statement should include dates and times when you audit your accounts. Include details about how you monitor your portfolio performance as well as benchmarks that will trigger changes.

Tip

  • Use a combination of investments to establish a well-rounded, balanced portfolio that can weather changes. Even if you have a high tolerance for risk, you still need to include a modicum of stable, low-risk investments to ensure your solvency.

Warning

  • Without a clear, definitive investment policy statement, you may be prone to emotional reactions to volatile market changes. Without clear directions and a firm commitment to stick to your original intent, you put yourself at risk for schemes and get-rich-quick opportunities. Overall, a firm commitment to your strategy prevents you from second-guessing your investments or creating stress. An investment policy statement helps a board of directors maintain a path without falling victim to fear and speculation.

Items you will need

  • Audit
  • Rules

About the Author

Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."

Photo Credits

  • Spencer Platt/Getty Images News/Getty Images