Investment Policy Statement (IPS) – Definition & Detailed Explanation – Investment and Wealth Management Glossary

What is an Investment Policy Statement (IPS)?

An Investment Policy Statement (IPS) is a document that outlines an individual or organization’s investment goals, objectives, risk tolerance, and guidelines for managing their investment portfolio. It serves as a roadmap for making investment decisions and provides a framework for evaluating the performance of the portfolio over time. The IPS is typically developed by a financial advisor or investment professional in collaboration with the client or organization.

Why is an Investment Policy Statement important?

An Investment Policy Statement is important for several reasons. First and foremost, it helps to establish clear investment goals and objectives, which can help guide investment decisions and ensure that the portfolio is aligned with the investor’s long-term financial goals. Additionally, the IPS helps to establish a disciplined approach to investing by setting out guidelines for asset allocation, risk management, and performance evaluation.

Having an IPS in place can also help to minimize emotional decision-making when it comes to investing. By outlining a clear investment strategy and sticking to it, investors can avoid making impulsive decisions based on short-term market fluctuations or external factors. Finally, the IPS can serve as a communication tool between the investor and their financial advisor, ensuring that both parties are on the same page when it comes to managing the investment portfolio.

What should be included in an Investment Policy Statement?

An Investment Policy Statement should include several key components, including:

1. Investment objectives: Clearly defined goals for the investment portfolio, such as growth, income, or capital preservation.
2. Risk tolerance: An assessment of the investor’s willingness and ability to take on risk in pursuit of their investment objectives.
3. Asset allocation: Guidelines for how the portfolio should be diversified across different asset classes, such as stocks, bonds, and cash.
4. Investment guidelines: Specific rules and restrictions for managing the portfolio, such as maximum exposure to certain sectors or industries.
5. Performance benchmarks: Metrics for evaluating the performance of the portfolio against relevant benchmarks or indices.
6. Monitoring and review process: Procedures for regularly reviewing and updating the IPS to ensure it remains aligned with the investor’s goals and objectives.

How is an Investment Policy Statement created?

Creating an Investment Policy Statement typically involves collaboration between the investor and their financial advisor or investment professional. The process may include the following steps:

1. Initial consultation: The advisor will meet with the investor to discuss their financial goals, risk tolerance, and investment preferences.
2. Data gathering: The advisor will gather information about the investor’s current financial situation, including assets, liabilities, income, and expenses.
3. Analysis: The advisor will analyze the investor’s financial information and develop a proposed investment strategy that aligns with their goals and objectives.
4. Drafting the IPS: The advisor will draft the Investment Policy Statement, incorporating the key components outlined above.
5. Review and approval: The investor will review the IPS and provide feedback or revisions as needed. Once both parties are in agreement, the IPS is finalized and implemented.

How often should an Investment Policy Statement be reviewed and updated?

An Investment Policy Statement should be reviewed and updated on a regular basis to ensure that it remains relevant and aligned with the investor’s goals and objectives. While the frequency of reviews may vary depending on individual circumstances, it is generally recommended to review the IPS at least annually or whenever there are significant changes in the investor’s financial situation or market conditions.

Regular reviews of the IPS can help to ensure that the investment portfolio remains on track to meet the investor’s goals and objectives. It also provides an opportunity to make adjustments to the portfolio as needed, such as rebalancing asset allocations or updating performance benchmarks. By staying proactive and regularly reviewing the IPS, investors can help to maximize the effectiveness of their investment strategy over time.

What are the benefits of having an Investment Policy Statement?

There are several benefits to having an Investment Policy Statement in place. Some of the key advantages include:

1. Clarity and focus: The IPS provides a clear roadmap for making investment decisions and helps to ensure that the portfolio remains aligned with the investor’s long-term goals and objectives.
2. Discipline and consistency: By establishing guidelines for asset allocation, risk management, and performance evaluation, the IPS helps to maintain a disciplined approach to investing and avoid emotional decision-making.
3. Communication and collaboration: The IPS serves as a communication tool between the investor and their financial advisor, ensuring that both parties are on the same page when it comes to managing the investment portfolio.
4. Performance evaluation: The IPS includes performance benchmarks for evaluating the performance of the portfolio over time, helping investors to track their progress towards their investment goals.
5. Flexibility and adaptability: While the IPS provides a structured framework for managing the investment portfolio, it also allows for flexibility to make adjustments as needed based on changing market conditions or the investor’s financial situation.

In conclusion, an Investment Policy Statement is a valuable tool for investors looking to establish clear investment goals, manage risk, and make informed decisions about their investment portfolio. By outlining key components such as investment objectives, risk tolerance, asset allocation, and performance benchmarks, the IPS provides a roadmap for achieving long-term financial success. Regular reviews and updates to the IPS can help to ensure that the investment strategy remains aligned with the investor’s goals and objectives, maximizing the effectiveness of their investment approach over time.