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Slide 1: What your investment policy statement means What’s an IPS, and what does it do for me? An investment policy statement, or IPS, is the foundation of a good investment strategy. It gives you an overview of the whole investment plan: the asset allocation, the objectives, the asset management approach and the ground rules for communication between you and your advisor. A good IPS defines your time horizon, your risk tolerance, your liquidity requirements and income needs, your return requirements, and your tax concerns. It also notes any special needs and circumstances. But most of all … Your IPS states the parameters by which you invest. You might consider yourself a value investor, a growth investor, or a conservative investor. With that preference established, your IPS defines a long-term asset allocation for you: a way to assign your invested assets to diverse asset classes in a way that suits your preferred investment style. Think of your IPS as long-term GPS for your portfolio. The goal is to set the asset allocation in a way that can potentially give you the highest possible rate of return corresponding to an acceptable level of risk. Your IPS keeps you from getting “off track” when it comes to investing. Over time, your financial advisor keeps an eye on your portfolio, to see that the assets inside it stay within the allocation boundaries set by your IPS. (This is why quarterly reviews are so essential.) Periodically, your portfolio may need to be rebalanced. Here’s why. As months go by, the ups and downs of the investment markets will throw your asset allocation slightly or dramatically out of whack. As an extremely simple example, let’s say you start out with 25% of your assets in U.S. large caps, 15% in U.S. mid caps, 15% in U.S. small caps, 20% in foreign shares and 25% in bonds. Suddenly, small cap stocks have a great quarter, and thanks to the great returns, you wind up with 21% of your assets invested in small caps and only 19% in bonds. Great, right? No. What’s actually happened is that your risk has increased along with your return. A greater percentage of your assets are now held in the comparatively risky stock market, removed from the bond market. So while the short-term gains have been great, it’s time to rebalance according to the parameters set by your IPS so that you can help reduce your risk exposure. For tax-deferred investment accounts, this is easily done: you simply transfer assets among accounts to restore the target allocations. Future contributions occur according the IPS parameters. When it comes to taxable investment accounts, it is usually best to ramp up future contributions to the underweighted funds rather than sell portions of a fund and trigger taxes.
Slide 2: Remember that you are a balanced investor. Your IPS is designed to help you invest in a consistent, appropriate way, a way that matches your preferred investment style. Without an IPS, you invite impulse, emotion and a short-term focus into the picture. If you’d like to learn more about the long-term value of an IPS, talk to your personal financial advisor today. International investing involves special risks such as currency fluctuation and political instability. The prices of small and midsize company stocks are generally more volatile than those of large company stocks. Ishan Goraydiya is passionate writer and loves writing about Retirement and Financial Planning. These days he is writing on Netbenefits.