The purpose of an Investment Policy Statement is to document an investment strategy to use as a guide for consistent and informed decision-making. It serves as a roadmap for achieving an investor’s investment objectives. But, more importantly, it can also keep investors from making costly mistakes in reaction to short-term events, reminding them to stay focused on their long-term objectives.
In addition to specifying goals, priorities, risk tolerance, and investment preferences, a well-conceived IPS contains guidelines for asset allocation targets, including the target allocation for main asset classes (i.e. stocks and bonds) and for sub-asset classes (i.e. global stocks by region).
An IPS also establishes monitoring and control procedures to be followed by advisors and clients, including frequency and benchmark tracking. More importantly, it includes the possible reasons for adjusting or altering the IPS based on the client’s changing circumstances as well as changing market and macroeconomic conditions. It also includes the reasons not to change the IPS (i.e. short-term market fluctuations). Finally, the IPS establishes a systematic review process that enables advisors and their clients to stay focused on the long-term objectives, even as the market gyrates wildly in the short term.
