Your Investment Policy Statement: Put It in Writing

In our previous post, “How to Hold a Financial Fire Drill,” we discussed the importance of understanding your true risk tolerance and routinely practicing how it applies to your investment plans. That way, when market risks arise for real, you’ll be less likely to abandon those best-laid plans. A key tool to help you stay on course is your Investment Policy Statement (IPS).

Your IPS: A Living Document

Your IPS is a written agreement, signed by you and your advisor when it is created as well as whenever it is updated. It should include detailed, up-to-date descriptions of the factors influencing your ongoing investment experience, such as:

  1. Investor “personality” – Your risk tolerance and other individual challenges and opportunities that may shape your investment expectations
  2. Financial life goals – Your and your family’s desired goals, including tax considerations, dollars and specific time horizons
  3. Investment approach – How your investment portfolio is being managed to advance your goals, including your investment strategy (yes, you should have one), desirable portfolio holdings and target asset allocations
  4. Roles and responsibilities – For whom the portfolio is being managed, your investor rights and responsibilities, and ditto for your advisor
  5. Procedures – Guidelines for how you and your advisor will review, rethink and revise your IPS to keep it current

Why You Need an IPS: Keeping Your Dreams Aloft

A 2013 Russell Investments survey found that most financial advisors were not using an IPS for all of their clients. One in five weren’t using them at all. We find this a significant concern. You may rarely refer to your well-designed IPS on any given day. But like that parachute we mentioned in our financial fire drill post, when you do need it, you really need it – and you need it to be in top working order.

As New York Times columnist Paul Sullivan observed, “An I.P.S. … is to a financial plan what a Range Rover is to a minivan. Both will carry your children safely, but only the Range Rover will power up a gravelly mountain.”

Who among us hasn’t had to soldier through some rocky markets from time to time? Whenever markets do turn sickeningly steep, it is tempting to begin second-guessing your well-reasoned plans. A well-maintained IPS can serve as a reliable touchstone during these risky times, when your human emotions may otherwise overtake your financial resolve.

Why You Need an IPS: Keeping Your Goals in Focus

On a more practical front, your IPS also comes in handy when you, your family members, or others involved in your financial affairs may forget the details of your personalized investment strategy. Was that a 60/40 or 70/30 fixed income/stock allocation we were designing for? Which accounts are earmarked for retirement and which are for college funding? Is my portfolio on track toward my stated goals or are disciplined adjustments warranted?

Having these sorts of details laid out in plain view can come into especially important play if the primary investor in a family is incapacitated and a spouse or other family member must take over the decision-making. With an IPS to reference, he or she can resolve questions that might otherwise be difficult to answer.

In short, it’s wise to have both the big picture as well as the granular details in writing in your well-crafted Investment Policy Statement. That way, come what may, everyone can best act in synchronized concert toward the same goals: yours.

BrainHarvardMeditationSage Serendipity: Mind over matter? In the face of life’s panics – in the market or anywhere else – don’t forget to meditate. Mindful meditation may not make your problems go away, but it should at least strengthen your ability to manage them.

Sheri Iannetta Cupo, CFP®, Founding Partner (Retired) & Director
[email protected]

SAGEbroadview Wealth Management is a Fee Only firm offering ongoing financial planning and portfolio management, with tax planning woven carefully throughout our services. We work virtually across the country, with offices in Farmington, CT, Morristown, NJ, and Burlington, MA.