Writing an investment policy statement

In simple terms

Professional investment managers usually work to an investment policy statement (IPS): a document setting out the goals, allowed investments, risk limits and review process for the money they manage. Individuals can write a much simpler version for themselves.

Its purpose is mainly behavioural. Decisions made in advance, calmly, are usually better than decisions made during a crash or a boom. An IPS is a letter from your calm self to your future anxious or excited self.

What to include

Keep it short, a page or two, in plain language.

1. Goals: each goal, its amount in today's money, its date and its priority, as the goals lesson explains.
2. Risk: your capacity and tolerance for losses, and the largest fall you are prepared to sit through.
3. Target allocation: the equity, fixed income and cash split for each goal, with ranges, as the asset allocation lesson explains.
4. Rebalancing: how often you will check and what drift triggers action, as the rebalancing lesson explains.
5. What you will invest in: for example low-cost index funds as a core; any individual shares limited to a set share of the portfolio; position limits.
6. What you will not invest in: for example derivatives, borrowed money, tips from unregistered people, or products you do not understand.
7. How you will choose investments: criteria such as cost, track record over full cycles, and fit with the plan.
8. Review: how often you will review, against which benchmarks, as the benchmarks lesson explains, and what would make you change the plan.

Using it

• Before acting, check whether a decision fits the statement. If it does not, either do not act, or change the statement deliberately and write down why.
• In a crash, the rebalancing rule may tell you to buy, the opposite of what fear suggests, as the emotional decisions lesson explains.
• In a boom, position limits and "not allowed" lists stop you chasing whatever is popular.
• At review, compare results with the benchmark and the plan, over long periods.

When to change it

Change the statement when your life changes: a new goal, a change in income, marriage, children, health, or a goal approaching. Do not change it because markets have risen or fallen. Writing down the reason for every change helps keep this discipline.

Not just for professionals

It is easy to think written rules are only for large portfolios. In fact, individuals are often more exposed to impulsive decisions, because no committee or client holds them to account. A one-page statement costs nothing and can prevent the most expensive mistakes.

Why it matters

Most investment damage comes not from lack of knowledge but from abandoning sensible plans under pressure. An IPS does not make markets kinder; it makes your response to them more consistent.

Limitations

A statement only helps if you follow it. It cannot foresee every situation, and rigid rules can occasionally be wrong for new circumstances, which is why it includes a process for deliberate change. It is a personal planning tool, not a guarantee of results.

Common mistakes

• Writing a long, vague document that is never read.
• Changing it after market moves rather than life changes.
• Leaving out what you will not invest in.
• Never reviewing it.

Try it yourself

1. Using your answers from earlier lessons, write a one-page statement with the eight sections above.
2. Ask yourself what it tells you to do if shares fall 30% next month, and if they rise 30%.
3. Store it where you will see it when you check your portfolio.
4. Set a date for your first yearly review.