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Charting Your Course: Understanding the Investment Policy Statement (IPS)

The financial world can be a vast and ever-changing landscape. For investors navigating this terrain, a clear roadmap is essential. This is where the investment policy statement (IPS) comes in. It serves as a foundational document that outlines your investment goals, risk tolerance, and investment strategies, acting as a compass that guides your financial decisions.

Unveiling the IPS: Purpose and Benefits

An IPS is a collaborative document created between an investor and a financial advisor (or independently for self-directed investors). It serves several crucial purposes:

Clarity and Alignment

The IPS fosters a clear understanding of your financial goals, risk tolerance, and investment preferences. This shared understanding between you and your advisor ensures your portfolio aligns with your overall financial objectives.

Disciplined Approach

The IPS helps curb emotional decision-making during market volatility. By having a predefined strategy, you’re less likely to make impulsive choices that could derail your long-term investment plans.

Communication and Review

The IPS serves as a communication tool, facilitating discussions with your advisor and ensuring they understand your evolving needs and risk tolerance over time. Regularly reviewing and updating the IPS is crucial to maintain its effectiveness.

Essential Elements of a Comprehensive IPS

A well-crafted IPS typically encompasses these key components:

  • Investor Information: This section details your basic background, including your age, income, and financial dependents.
  • Investment Objectives: Clearly define your short-term and long-term investment goals. Are you saving for retirement, a child’s education, or a dream vacation? Specificity is key.
  • Risk Tolerance: Evaluate your comfort level with investment risk. This involves understanding how much fluctuation in your portfolio value you can withstand.
  • Investment Time Horizon: Specify your timeframes for various investment goals. Knowing how long you have before needing the money helps determine the appropriate asset allocation.
  • Asset Allocation: This section outlines the ideal mix of asset classes (stocks, bonds, cash equivalents, etc.) within your portfolio. The asset allocation should reflect your risk tolerance and investment goals.
  • Investment Guidelines: This section can include specific preferences regarding investment styles (e.g., value investing, growth investing) or restrictions on certain asset classes.
  • Review and Revision: The IPS is not a static document. Schedule regular reviews (usually annually) to assess your circumstances and update the IPS accordingly to reflect any changes in your goals, risk tolerance, or financial situation.

Crafting Your IPS: A Step-by-Step Guide

Developing a robust IPS requires careful consideration. Here’s a roadmap to get you started:

  1. Gather Information: Assemble your financial statements, including income, expenses, and existing investment holdings.
  2. Define Your Goals: Identify your short- and long-term financial objectives. Be as specific as possible with timelines and desired outcomes.
  3. Assess Your Risk Tolerance: Evaluate your comfort level with market fluctuations. Consider factors like your age, financial stability, and emotional response to potential losses.
  4. Determine Your Time Horizon: Specify the timeframe for each of your investment goals. This helps determine appropriate asset allocation strategies.
  5. Research Asset Classes: Educate yourself on different asset classes (stocks, bonds, real estate, etc.) and their risk-return profiles.
  6. Develop an Investment Policy: Outline your preferred asset allocation, any investment style preferences, and restrictions on specific asset classes.
  7. Seek Professional Guidance: Consider consulting with a financial advisor to assist you in crafting and implementing your IPS.
  8. Schedule Reviews: Commit to reviewing and updating your IPS periodically to ensure it remains aligned with your evolving needs and circumstances.

By following these steps and incorporating the core elements, you can develop a comprehensive IPS that serves as a cornerstone for making sound investment decisions and navigating the financial markets with confidence.


The investment landscape can be unpredictable, but with a well-defined investment policy statement (IPS) in place, you can approach your financial journey with clarity and purpose. The IPS serves as a guiding document that outlines your goals, risk tolerance, and investment strategies, ensuring your portfolio stays aligned with your long-term aspirations.

Remember, the IPS is a dynamic document. Regularly revisit and revise it to reflect any changes in your financial circumstances, risk tolerance, or investment goals. By following this roadmap and maintaining a disciplined approach, you can navigate the investment world with greater confidence and make informed decisions that propel you towards achieving your financial objectives.

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Frequently Asked Questions

Who needs an investment policy statement?

Anyone with investment goals, regardless of experience level, can benefit from an IPS. It provides a framework for both individual investors and those working with a financial advisor.

Isn’t my financial plan enough?

Your financial plan encompasses your broader financial goals, while the IPS focuses specifically on your investment strategy. The IPS acts as a detailed roadmap within your overall financial plan.

How often should I review my IPS?

Regular review is essential. Aim for annual reviews, or more frequently if you experience significant life changes like a job change, inheritance, or starting a family.

Can I create my own IPS, or do I need a financial advisor?

You can definitely create your own IPS. However, a financial advisor can offer valuable guidance on risk tolerance assessment, asset allocation strategies, and tailoring the IPS to your unique circumstances.

What if my risk tolerance changes over time?

Life circumstances can alter your risk tolerance. The IPS allows you to adjust your asset allocation or investment strategies to reflect these changes, ensuring your portfolio remains aligned with your evolving comfort level.

Is the IPS legally binding?

No, the IPS is not a legal document. However, it serves as a powerful tool for communication and alignment with your financial advisor. It reflects your investment preferences and helps ensure your advisor manages your portfolio accordingly.

What if I don’t have clearly defined investment goals?

The IPS creation process can be a clarifying exercise. By considering your future aspirations and outlining goals, the IPS helps you develop a roadmap for achieving them.

How can I ensure I stick to my IPS during market volatility?

The IPS serves as an anchor during turbulent times. When emotions run high, revisit your IPS to re-center yourself on your long-term goals and investment strategy.

Can the IPS help me avoid emotional investing decisions?

Absolutely! The IPS encourages a disciplined approach by establishing clear guidelines. Having a predefined strategy reduces the temptation to make impulsive decisions based on market fluctuations.

Where can I find more information about creating an IPS?

Numerous resources exist! Financial advisor websites, investment publications, and online platforms offer guidance on crafting an IPS. You can also consult with a financial advisor for personalized assistance.

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