The DIY Investment Policy Statement (IPS) Sample and Template

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If you invest any money at all it is important to create your own investment policy statement (IPS). Even if you’re just getting started with your 401k, I would highly recommend spending creating an IPS. If you’re expanding to other accounts like IRAs, HSAs, 529s, or individual stocks, it becomes even more important to create an IPS.

What is an Investment Policy statement?

An investment policy statement (IPS) is an agreement between you and how you want your money to be managed to achieve your goals. Generally, large investment firms will have an IPS for their individual mutual funds and client groups, but that doesn’t mean that you cannot create one for yourself especially if you’re a DIY or self-directed investor.

Benefits of having an investment policy statement?

  1. Having an IPS will force you to really think about your financial goals and how to achieve them.
  2. It will help you stick to your plan and avoid making emotionally charged decisions that go against your fundamental strategy.
  3. It will likely lead to greater wealth than if you otherwise did not have one to follow.
  4. It will be your guide to help answer questions related to managing your investments, especially during stressful times.

Think of it this way. Your IPS is like your GPS. A good GPS will help you stay on the planned path and help you navigate unexpected events while traveling toward your destination.

What if i have a financial advisor?

While having an IPS is more important for those without financial advisors, it is also important for those who hired someone else to manage their investments.

We can all agree that no one cares more about your money than you. So time to put your money where your mouth is. There is no better way to have your financial advisor understand your goals, timeline, and risk tolerance than to have it down on paper before you make any big moves.

Free investment policy template

For the new and the seasoned investor

What goes in an ips?

Investment policy statements are quite variable, but you can pretty much include whatever you want to help you make the best investment decisions in the future. However, there are some main components that every IPS should include.

  • Investment Objective
  • Investment Philosophy/Strategy
  • Time Horizon
  • Desired Asset Allocation

If you build upon the above 4 to start, you will be in great shape. Other sections or topics you may want to consider include:

  • Emergency fund strategy
  • Drawdown Strategy
  • Other considerations

If you are just learning how to invest, you may not know where to start. It is okay to have a sentence within each section and develop it later as your knowledge and experience grows.

Sample: my investment policy statement

Here is the IPS that my wife and I have developed to help us achieve our financial goals. Committing our plan to paper has simplified our financial plan and has been a resource for us to refer to and build upon.

Objective(s)

Financial Independence:

  • We will build an investment portfolio of $1 – 1.5 million with a safe withdrawal rate of 3% that will meet or exceed our annual expenses by 2028.

Future Kids’ College Fund:

  • We will automatically invest up to $1,200/year in a 529 plan until our future children need the funds for their education
  • We will consider leveraging real estate

philosophy/Strategy

Securities to purchase

  • We will prioritize investments in purchasing broad-based domestic low-cost index funds through our tax-advantaged and taxable accounts.
  • Any bonds will be held in tax-advantaged accounts for tax efficiency
  • If an opportunity arises, we may take advantage of undervalued individual stocks as part of my Free Money Game
  • I will purchase individual stocks using M1finance or digital assets using coinbase up to the threshold documented in my asset allocation section
  • We may purchase actively managed mutual funds if there are no other options within a given investment vehicle such as a 401k, 403b, or Health savings account.
  • We may also mirror VTSAX by investing in 81% Large-cap, 6% Mid-cap & 3% small-cap as noted by this post in JLcollin’s stock series.
  • Rental properties will be considered given careful analysis

Emergency Fund Strategy:

  • Maintain a 6-month emergency fund while working full-time
  • Increase to 1-year emergency fund before “semi-retirement”
  • Increase to a 2-year emergency fund before “retirement”
  • Drawdown as needed for emergencies and bear markets
  • Replenish before investing
  • Keep cash in a high-yield savings account.

Sequence of Investment Contributions

  • Max out all tax-advantaged accounts annually by front-loading
  • If unable to max out any given year, invest in the following sequence: 401k/403b’s up to the match > Max out HSA’s  > Max out IRA’s > Max out 401k/403b’s
  • Contribute remaining funds in taxable brokerage accounts, towards real estate opportunities, or to replenish cash reserves

Holding Period

  • Primarily long-term buy and hold for both stocks and real estate
  • We may have very limited participation in short-term sales using Robinhood with current “Play Money.”

Dealing With Debt

  • We will prioritize paying off high-interest debt which we will consider to be > 5%
  • We will choose to pay off our primary residence whenever feasible
  • Debts will be paid off using a hybrid of the debt avalanche and debt snowball strategy

Drawdown

  • Drawdown 3% of the portfolio for the 1st year and adjust for inflation during the following years.
  • During bear markets and recessions, we will eliminate drawing down and begin withdrawing from our cash bucket.
  • If need be, return to traditional work, ramp-up self-employment, or side-hustles
  • Utilize ROTH conversion ladder strategy during retirement or low-income years, 
  • Drawdown HSA as needed for medical expenses. Ensure medical receipts are saved for future claims. Upload to Google Drive & Lively
  • Delay withdrawing social security benefits until the maximum benefit is exhausted assuming good health and social security solvency. Withdraw sooner if the break-even point is unlikely based on age/health.

Asset Allocation

Current Asset Allocation (Wealth Accumulation Phase)

  • Stocks = 100%
    • Mostly broad-based index funds
    • Individual stocks < 10%
  • Bonds = 0%
  • Emergency Fund = 6 months – 1 year

Target Asset Allocation (Semi-Retirement Phase @ ~ 38 y.o.)

  • Stocks = 90%
    • Mostly broad-based index funds
    • Individual stocks < 5%
  • Bonds = 10%
  • Emergency Fund = 1 – 2 years

Target Asset Allocation (Full-Retirement/Wealth Preservation Phase @ ~ 45 y.o.)

  • Stocks = 75%
    • Mostly broad-based index funds
    • Individual Stocks < 5%
  • Bonds = 25%
  • Emergency Fund = 2 years

Other Considerations:

  • Keep allocations to digital assets limited to 1%
  • Exclude digital assets from asset allocation consideration when it comes to rebalancing due to a number of factors including risk, novelty, volatility, and layers of complexity.

If rental income or social security income exists, we may consider increasing our allocation in the stock market and lowering it in the bond market.

Maintenance

Monthly:

  • Review income and expenses via personal capital to ensure accuracy (<15 min process)

Quarterly:

  • Check rental properties quarterly (2 hrs)

Annually:

  • Review annual income and expenses via personal capital account adjust FI number as necessary. (1 hr)
  • Rebalance all accounts that have deviated greater than 5% (1 hr)
  • Review this IPS to ensure it aligns with our financial plan (1 hr)
  • Make adjustments in IPS or financial plans if there is new knowledge that leads to a fundamental change

events

Pregnancy/Kids/Dependents:

  • Buy term life insurance for a 5-15 year period or until self-insured. We should be self-insured by age 45
  • Ensure beneficiaries are assigned correctly
  • Complete a living will and will

One Mil’ Mark

  • Have a drink
  • Consider an umbrella policy

Loss of W-2 Job

  • Make sure resume is updated and begin sending out
  • Consider simplifying tax-deferred accounts such as 401k/403b. This may also reduce account maintenance fees. Refer to this Reference for guidance on whether or not to roll over our 401k/403b.
  • Transfer our HSA by means of a trustee-to-trustee transfer into Lively
  • Consider taking a break from W-2 work and placing 100% of our time and efforts for 6 months into business/side-hustles.

Tax-Loss Harvesting Opportunity

  • When there is a 5 – 10% market dip, apply the following tax-loss harvesting strategy.
  • Step 1: Make sure to turn off automatic reinvestments and set up calendar reminders to reinvest dividends quarterly to avoid wash sale rule
  • Step 2: Select exchange funds
  • Step 3: Select “specific ID” method to determine which lots to sell and which to leave alone
    • Attempt to offset capital gains first to increase cost-basis in a partner fund
    • If there are no capital gains to offset, exchange 100% of the fund for a partner fund 
    • Record total losses realized and add to any losses carried over from prior year(s)
    • Make sure cost basis set to “specific ID” for each brokerage account 3-5 days after exchanging funds to ensure it will promptly be ready for another TLH event
  • All taxable brokerage accounts should be traded between these three funds VTSAX, VLCAX, and VTCLX
  • All Tax-advantaged accounts hold VFIAX or anything else that is not “substantially similar” to what is in our taxable brokerage account

For more details refer to this post by Physician on Fire

Bear Market (>20% decline)

  • Don’t panic sell, just don’t do it
  • Also, don’t panic-buy
  • Tax-loss harvest
  • Listen to JL Collins video

Final thoughts

Before the bear market in 2020, we did not have an IPS. It was our first bear market and we saw our portfolio take a 6-figure nosedive. It was emotional and I almost let it get the best of me. If I had sold my positions when I thought about it, I would have locked in those losses. If it continued to fall, I wouldn’t briefly pat myself on the back, but I would’ve kept on waiting for it to fall lower. If it climbed up, I would’ve thought it would return to its lows eventually. With timing the market, you have to be correct twice and it’s hard being correct one, so why do it.

I’m sure you hate second-guessing yourself as much as I do. I’ve committed my plan to paper and it feels so much better. If you want to do the same, I created a template for you to work from. Even better, it comes with a bank of statements to get you started.

FREE INVESTMENT POLICY TEMPLATE

For the new and the seasoned investor

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Comments (2)

All I can say is this post is amazing! It’s so detailed and dives into everything. Not only that but you have a free template for others to use. Great job I sent you a few questions on twitter. I’ll be sharing this post.

Hey David, thank you so much for showing your appreciation! I look forward to chatting on twitter. Talk to you soon.

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