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“Let’s start at the very beginning, a very good place to start…”- The Sound of Music
The Investment Policy Statement (IPS), serves as a written representation of your financial/investing objectives and the various strategies you are employing to achieve them.
This has an added benefit of providing a guideline to heirs in the event of your untimely demise and allows them to continue this investment philosophy without missing a beat.
This document serves as an emotional stabilizer during market upturns and downturns.
A good IPS will prevent you from chasing the market or abandoning the market by having set parameters in place ahead of time of what actions to take in any given scenario.
The ideal time to create an IPS is before you have much “skin in the game” investment wise so that you do not have undue prejudice from past investment returns.
However it is never too late to create an IPS, just be cognizant of this potential influence clouding your judgement.
Past performance does not guarantee future results.
This is the typical warning found in every mutual fund prospectus or investing documentation.
It has become so ubiquitous that seasoned investors can have their eyes glaze over reading it over and over again and it loses its meaning (much like the smoking may cause cancer label on cigarettes that have shown little ability to curb the habits of smokers).
However it is a vital concept to commit to memory.
It is naive investors chasing past performance that create a “bubble” type scenario where the price runs up dramatically.
Everyone wants in on the latest craze until current market valuation far exceeds true valuation and the bubble is popped.
“I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.”- Warren Buffet
By the time you read the next hot tip in the newspaper or have media pundits screaming it at you on television it is too late. The smart money was already made and now the dumb money will follow hoping to hop on the train.
So what should a serviceable IPS contain?
A listing of your current financial holdings/financial institutions is a good start. It again allows heirs to get an overview of everything in one place and also prevents certain accounts from potentially being lost during a surely hectic transition time.
Your investment objectives (which can be sorted out by timeframe)
Short term: Car, House down payment, etc
Medium term: Children’s college education and/or wedding costs, etc.
Long term: Retirement or Legacy funds for future generations
Asset allocation
How you divide your portfolio among the various asset classes by percentage.
Can write down guidelines of how these percentages can change based on age milestones or approaching retirement (as get older and/or approaching retirement have a gradual shift from more risky/volatile assets such as stocks and build up a more reliable fixed income allocation.
Desired contribution rate and to what type of investment vehicle (tax-deferred, Roth, or taxable).
Rebalancing criteria (If one particular asset class has done well or another has performed poorly, your portfolio may have unintended weighting in a particular class and rebalancing must be performed to bring back in line.)
How often to rebalance
Range or band an asset class can deviate from desired amount before rebalancing (can be a dollar amount or % (for example +/- 5% deviation from desired percentage)
This is not a binding contract and can be changed as life circ*mstances change (but should refrain from altering just based on market volatility or large market swings in either direction).
It’s underlying purpose is to serve as a beacon during stormy investment seas.
Superpower Take-home Points:
An Investment Policy Statement (IPS) is a nonbinding document you create that has many benefits to help prevent knee-jerk reactions to market swings
An IPS allows heirs to find your financial holdings and your investment beliefs/wishes in the event of an untimely death.
An IPS can be modified as life circ*mstances change but should not be altered solely in reaction to the stock market.
NOTE: The website XRAYVSN contains affiliate links and thus receives compensation whenever a purchase through these links is made (at no further cost to you). As an Amazon Associate I earn from qualifying purchases. Although these proceeds help keep this site going they do not have any bearing on the reviews of any products I endorse which are from my own honest experiences. Thank you- XRAYVSN
While the investment policy statement is a living document, investment policies and guidelines should not change frequently. For example, short-term changes in the markets should not require an adjustment to the document.
An IPS lists the investor's investment objectives, along with their time horizon. For example, an individual may have an IPS stating that by the time they are 60 years old, they want to have the option to retire, and their portfolio will annually return $65,000 in today's dollars given a certain rate of inflation.
The investment policy statement is designed to guide the sponsor's retirement plan committee as it decides, with the plan's financial services provider, on investment options to include in the plan, and to evaluate the performance of those investments over time.
An Investment Policy Statement (IPS) outlines the principles that guide the management of a client portfolio. The IPS includes information about the client's investment horizon and objectives, risk tolerance, specific requirements, and/or restrictions.
General statements of policy are not legally binding; rather, they are issued in order to advise the public about the manner in which the agency intends to exercise its discretionary authority.
A written IPS allows investment managers to instruct clients about the proper use and purpose of investments. A written investment policy statement (IPS) is most likely to succeed if: it is created by a software program to assure consistent quality. it is a collaborative effort of the client and the portfolio manager.
Financial advisors often prepare complicated investment policy statements for their clients, complete with appendixes, footnotes, and legal disclaimers.
Clients have a role in the IPS beyond providing the information that can help tailor it to their personal needs. They must review it and sign it to signal agreement.
Investment advice is a targeted and specific form of guidance such as investment allocation or an insurance review. A financial plan is a broader, more comprehensive document that can help uncover areas of financial concern and be used as a roadmap to reach your financial goals.
While not required by ERISA, creating an IPS has become a best practice for plan sponsors. An IPS is a written policy that defines the plan's investment philosophy, and the criteria and process for selecting and monitoring investments.
Your statement will call out your “beginning balance,” or the amount of money your account started with at the beginning of the statement period (quarterly or annual), and your “ending balance,” or the amount of money you have at the end of the statement period.
You should keep retirement plan records until the trust or IRA has paid all benefits and enough time has passed that the plan won't be audited. Retirement plans are designed to be long-term programs for participants to accumulate and receive benefits at retirement.
In summary, an Investment Policy Statement is a critical tool for successful investing and reaching your goals. It provides clarity and focus, establishes consistency and discipline, helps manage investment risk, promotes accountability and monitoring, and facilitates communication and collaboration.
The definition of a policy statement is a written statement that declares an organization's intentions, objectives, or goals. Policy statements can also be thought of as organization-level documents that prescribe acceptable methods or behaviors for certain situations.
The investment policy statement is the investment blueprint for an organization. A well- designed investment policy statement identifies the key risks and concerns that could affect a business and will establish controls to mitigate those risks.
Constraints include factors that need to be taken into account when constructing a portfolio. These include liquidity requirements, time horizon, regulatory requirements, tax status, and unique needs.
While not required by ERISA, creating an IPS has become a best practice for plan sponsors. An IPS is a written policy that defines the plan's investment philosophy, and the criteria and process for selecting and monitoring investments.
This IPS is intended to (i) document the Board's expectations, objectives, and guidelines for the investment of Fund assets; (ii) set forth an investment structure for managing these assets; (iii) provide guidelines for monitoring the level of overall risk, return and liquidity; (iv) encourage effective communication ...
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Rebalancing criteria (If one particular asset class has done well or another has performed poorly, your portfolio may have unintended weighting in a particular class and rebalancing must be performed to bring back in line.)
An IPS allows heirs to find your financial holdings and your investment beliefs/wishes in the event of an untimely death.
NOTE: The website XRAYVSN contains affiliate links and thus receives compensation whenever a purchase through these links is made (at no further cost to you). As an Amazon Associate I earn from qualifying purchases. Although these proceeds help keep this site going they do not have any bearing on the reviews of any products I endorse which are from my own honest experiences. Thank you- XRAYVSN