How to Write Your Very Own Investment Policy Statement – Getting Started

In his book, Optimal Investing (Affiliate Link), Scott Frush writes this about the importance of having an Investment Policy Statement:

Much like a blueprint for building a house, an Investment Policy Statement serves as the blueprint for building your optimal portfolio. This policy is crucial to the long-term achievement of your specific financial goals. First and foremost, an Investment Policy Statement helps you learn more about what your needs and priorities are, how to best address them, and the risks involved with investing. Secondly, this policy allows you and your portfolio manager (if you elect to employ one) to gain a better understanding of your objectives and constraints and how to best manage your portfolio to accomplish your specific financial goals.

A written Investment Policy Statement will not alone guarantee success in protecting and growing your optimal portfolio. Rather, it will shelter your portfolio from ad hoc revisions, made by either you or your portfolio manager, from a sound long-term asset allocation policy.

Basically, an Investment Policy Statement should explain why you’re investing (your goals) and what you are investing in. Why is this important? Because human nature tends to take over when times get tough and might cause you to make changes to your investment plan based on emotion rather than sound logic. Being able to pull out and read through your Investment Policy Statement (IPS) will give you comfort and just might keep you from making a serious mistake.

Frush recommends that the following be included in your IPS:

1. Your current portfolio
2. Your objectives and constraints
3. Recommended (or desired) portfolio
4. Portfolio construction process
5. Portfolio monitoring process
6. Portfolio rebalancing process
7. Annual review process
8. Agreement between you and your portfolio manager (you can leave this out if you manage your own money)

While researching this post, I came across a very helpful Investment Policy Worksheet (PDF) that asks the following questions in order to help you put together your IPS:

Executive Summary

1. What are the current assets of my portfolio today?
2. How much do I plan to invest each month?
3. how many years will I be investing?
4. How much do I expect my portfolio to return each year over inflation?
5. How much of a loss can I accept over:

  • a three month period?
  • a one-year period?
  • a five-year period?

6. What is my target asset allocation?

  • Cash
  • Bonds
  • Large-comany stocks
  • Small-company stocks
  • Foreign stocks

7. What are the benchmarks for my portfolio?

Investment Objectives

1. What is my financial goal(s)?
2. How long will I need to be funding this goal?
3. how much will this goal cost every year?

Investment Philosophy

1. What’s important to me as an investor?
2. What’s my philosophy about risk (or volatility)?
3. What’s my philosophy about core versus noncore investments?
4. What’s my philosophy about diversification?
5. What’s my philosophy about trading?
6. What’s my philosophy about costs?
7. What’s my philosophy about taxes?

Investment Selection Criteria

1. What are the investment selection criteria for my mutual funds or exchange-traded funds?
2. What are the investment selection criteria for my stocks?

Monitoring Procedures

1. How often will I monitor my portfolio?
2. How will I determine how well my individual investments are doing?
3. How will I determine how well my overall portfolio is doing?
4. How will I determine if my portfolio is meeting my expected return?
5. How will I determine whether losses fall within my accepted range?

After answering those questions, you are then supposed to take your answers and rewrite them in the form of a statement. The process is similar to writing a mission statement. I’ll admit that some of those questions are bit vague and would require quite a bit of research in order to answer them properly. In fact most of the above questions are potential blog posts by themselves, which I will tackle over the next few weeks so that we can build a process for creating our own Investment Policy Statements.

So, that’s something to look forward to. In the meantime, I suggest you download Morningstar’s Investment Policy Worksheet and begin filling out what you can. If you have any questions, either leave a comment below or send me an email.

One thought on “How to Write Your Very Own Investment Policy Statement – Getting Started”

  1. Wow, just looking over this I have almost no idea what my strategy is. I have been considering trying to go beyond using a target retirement fund. Thanks for giving a great way to start researching what I am really trying to do.

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