So what is an Investment Policy Statement (IPS) and why do you need one? Will it benefit you and your long-term financial security? Will it help you in retirement? Will it help you reduce stress and worry and build wealth? Yes! In fact, you can do more than that.
An IPS is a document that aims to define:
- investment goals
- Strategies to achieve those goals
- A framework for making intelligent changes to your investments
- Options for what to do if things don’t go as expected
Why is it necessary to declare an investment policy?
There are many benefits to creating an investment policy statement.
You can do better (5x better by one estimate)
Founder Paul Merriman Merriman Financial Education Foundationclaims that people who have a written plan to manage their investments will, on average, have five times more money in retirement than those without a written plan.
He cites a study published in Fortune magazine. I’m not sure if this is an exaggeration, but it doesn’t take a leap of the imagination to believe that you can do better by following a consistent investment strategy.
Make a plan:
improve concentration
It’s easy to get excited when investing begins. However, the key is to stay focused on achieving your financial goals.
Reduces mental load and increases clarity and confidence
Scrolling through financial headlines about inflation, Social Security issues, corporate earnings reports, or the possibility of a frightening drop in the stock market can be stressful.
However, if you have a plan for what to do in various situations (including a stock market crash), you don’t have to worry as much. You will feel more confident and secure. You’ll also know which news stories require action and which headlines you can ignore.
Enabling accountability and measurement
You probably know what companies, funds, and bonds you own. Online tools also make it easy to track your investments over time. But what is the purpose?
If you haven’t set goals for each investment and your overall portfolio, how do you know you’ve achieved them? You can’t get there if you don’t know where they are. IPS defines the “where” or the goal. Also, if you encounter an obstacle, it will show you the detour you should take to get there.
You may be able to see which of your stocks are rising by what percentage. But without goals to achieve, you can’t evaluate whether your position is actually “good” or not.
Encourages correct behavior and behavior (even under stress)
Our basic instincts and biases tend to work against us when it comes to making sound financial decisions, especially when faced with stressful situations, complex decisions, unpredictable events, and money. Learn more about how cognitive biases can impair your judgment.
Most of the time, you don’t want to make emotional decisions about money. Most financial decisions must be made from a rational and analytical perspective.
A good investment policy statement will ensure better financial results, especially if all parties involved understand the document. IPS is especially useful during stock market crashes and during major life changes and transitions.
As Ben Carlson of the blog, a wealth of common sensetold Boldin founder Steve Chen on a podcast.
“…It’s really about understanding yourself, your own emotions, and more highly your lower self, and understanding what doesn’t work for you. So what’s bad and what doesn’t really fit into your investment plan? If you can get rid of everything, only what’s left will work for you, and you’ll avoid all the other pitfalls, which is the situation that many investors find themselves in.”
How to prepare an investment policy statement
Investment policy statements are most often drafted in conjunction with a financial advisor. You also have options depending on the level of service you want from your advisor. However, you can also create an IPS yourself.
try it yourself
Having an IPS is probably especially important if you are a self-directed investor. It helps you define, organize and execute your strategy.
See below for instructions on creating your own IPS. It might also be helpful to look at some examples. bogle heads There is a simple sample IPS that can be linked to other options. morning star is IPS template.
Try it with an advisor
You have options for how you can work with your advisor to develop your investment policy statement.
Fixed price: You can pay a flat fee or an hourly fee, and your advisor will help you define your investment strategy and create your IPS. Typically, this arrangement leaves you executing the strategy yourself. An advisor can help you determine your desired asset allocation and what to do under different conditions. You are primarily responsible for making purchasing decisions and maintaining the plan.
This is usually the most cost-effective way to manage your investments with expert guidance.
- Bouldin’s offer Fixed price advisory service. You can work with a certified financial planner who has taken the fiduciary oath. Boldin Advisors specializes in retirement and works with you digitally via phone or Zoom to keep costs low and help you define the right investment policy for your goals and needs. Setup is easy discovery conference.
Assets under management: You can outsource the definition and execution of your IPS to an advisor, typically paying an assets under management (AUM) fee for the service.
Steps required to create your own investment policy statement
Step 1: Identify your resources, needs, and goals
First, consider how much you have saved, how much you want to add to it, how much you need in retirement, and perhaps most importantly, how you can generate the income you need in retirement.
Retirement is typically the penultimate financial goal, so creating a detailed, written retirement plan is an important first step.
Investment goals may include details such as, among other things:
- You can withdraw or generate $X in income every month for the rest of your life.
- A portfolio that generates $X in dividends each year
- Investment returns match or exceed inflation
- Ability to leave $X in trust to heirs
- Minimize taxes and investment fees
Step 2: Understand your risk tolerance and time horizon
Once you understand what you currently have, your needs and goals, you can decide on your risk tolerance and investment horizon.
time horizon: A time horizon is the number of months, years, or decades you plan to invest to achieve a specific financial goal. Long-term investors may be comfortable taking on riskier investments because they can wait out economic cycles and market ups and downs. In contrast, an investor saving for a teenager’s college education is likely to be at less risk because the time horizon is shorter.
risk tolerance: Risk tolerance is the ability and willingness to lose some or all of your original investment in exchange for a greater potential gain. Investors with a high risk tolerance are willing and able to tolerate losses. Conservative investors, or those with a low risk tolerance, tend to prefer investments that preserve their original investment.
Step 3: Establish your ideal asset allocation
When it comes to investing, there are many options, including stocks and equity mutual funds, corporate and municipal bonds, bond ladders, bond mutual funds, index funds, life cycle funds, exchange-traded funds, money market funds, and U.S. Treasury securities. .
Different investments and combinations of investments are suitable for different goals, risk tolerances, and time horizons. Determining what percentage of your portfolio to invest in different types of investments is one of the purposes of IPS.
for example:
- If you are 20 years old and have a lot of human capital and no investment money, stocks are not a risk at all. In fact, if you’re a young saver, you really want horrible stock market returns and volatile markets so you can get stocks very cheap.
- However, if you are older and need savings for your income, you probably shouldn’t invest 100% in stocks. Stocks are too risky if you don’t have a long term to make up for short-term losses.
Beyond risk and expected return, your ideal asset allocation may also need to reflect your values. What types of investments make sense for you? Local real estate? International diversification? Are companies and funds the only ones that reflect your personal interests and values?
Learn more about the best asset allocation strategy for retirement.
Step 4: Create benchmarks and monitoring procedures
Other important aspects of an investment policy statement are determining how often investments will be monitored and how the performance of individual investments will be evaluated. Additionally, you need to establish a baseline for determining how well your portfolio as a whole is doing.
You want to establish this up front. You don’t want to react immediately to market conditions.
Examples of benchmarking and monitoring include:
- How often to check your portfolio
- What do you want to monitor for each investment and your overall portfolio?
Step 5: Identify triggers for rebalancing and changes
In Boldin’s podcast with Chen, legendary investor Bill Bernstein talked about the importance of having an investment plan and sticking to it. he said:
“What I’m trying to say is that your portfolio is like wet soap; the more often you touch it, the less of it there is.”
bill bernstein
Ideally, you would set up your portfolio in a way that requires little interaction. However, there may be times when you need to make changes. These instances should be anticipated and documented in the investment policy statement.
Here are some things to consider:
- How often do you rebalance to maintain a given asset allocation?
- At what price or over what period do you want to sell your investments?
- What if your losses are below a certain threshold or your profits are above a certain threshold?
- What happens if I quit my job?
- Will changes in health or death in the family affect IPS?
- How do changes in income affect IPS?
Add IPS to your retirement planning to-do list
Investing for retirement is complex, even more so than during your working life. When you retire, you have a lot of competing priorities. Also, creating an investment policy statement can be a daunting task. But a well-thought-out IPS can help you navigate even the roughest financial waters.
Please contact us for search Pre-vetted financial advisor Someone who can work with you and your Boldin plan to set up an IPS.
