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Our focus today will be “Investment Policy Statement (IPS).” I’ve thrown this word around before, and it’s already in the Glossary, but we’ll cover it again here:
Investment Policy Statement (IPS):
A written document outlining your investment goals, risk tolerance, time horizon, asset allocation preferences, and guidelines for managing your portfolio. It serves as a roadmap for you (or your advisor) to make disciplined, consistent decisions and avoid emotional reactions during market volatility.
This is a topic that can be as complex or as simple as you want it to be. For example, my IPS is an email to myself. It says “60% US stocks, 30% International Stocks, and 10% Bonds.” Every year in the first week of January I gather up all my accounts and I see if I’m off balance. I then sell and buy the index funds that I am holding in order to maintain my balance across my accounts.
Do not worry, I’ll cover index funds and what you can do with the money you’re putting in your 401k or other investments after this article.
The key to having an IPS is that it stops you from chasing trends and it keeps you calm during down markets. An IPS is not set in stone, but it is something you shouldn’t alter without long consideration. Another example, this year I had a plan to generate $1,000 a month in dividends. This blog tracks that under Snowball Experiment. I knew that aiming for this could throw my IPS out of whack and I made a plan to not allow the dividend portion of my investments to exceed 10% of my total portfolio this year. I will alter and advance this as time goes on, and many of the dividend funds I’m using are US based which would place them in the 60% area anyway.
If you Google Investment Policy Statement, you will find many examples and deep dives. Some of these decisions should be based on age and risk tolerance, but they should be decided before you place a penny into a fund. For most people the S&P 500 will be their largest and first holding. This is the top 500 companies in the United States. It will historically make you the most money over time than even the most savvy professional investor. But the question, is are you comfortable putting 100% of your future on only US companies?
This is what the IPS is meant to cover, risk and portfolio diversity. Many people trust real estate to always come out ahead, after all they aren’t making more land. So people will put that as a portion of their IPS. That doesn’t mean owning a house, or rental properties, there are plenty of funds or investments tied to real estate. For many younger people they don’t want any bonds, which is understandable so keep those out.
The IPS is custom to you and it can be as simple as mine, or as detailed as you want with breakdowns per company, fund, or cash that you would like. I recommend creating this now between articles as the next one is going to talk more about Broad Based Index Funds specifically.
~~Miniwing~~
Investor, Stoic, Parent