The DIY Investment Policy Statement (IPS): Sample and Template

Creating a DIY Investment Policy Statement (IPS) is a crucial step for any investor seeking to establish a clear, structured approach to managing their investments. An IPS serves as a roadmap, guiding your investment decisions and helping you stay focused on your long-term financial goals. This article will explain the importance of an IPS, outline the key components, and provide a sample and template to help you create your own.

What is an Investment Policy Statement (IPS)?

An Investment Policy Statement (IPS) is a written document that outlines an investor’s goals, strategies, and rules for managing their investment portfolio. It serves several purposes:

• Defines Objectives: Clarifies your investment goals and time horizons.
• Establishes Guidelines: Sets forth the strategies and asset allocation policies that will help you achieve your objectives.
• Provides Discipline: Helps maintain a consistent investment approach, especially during market volatility.
• Measures Performance: Establishes benchmarks for evaluating the performance of your investments. Click here to read about the Breakdown of How I Paid Off Over $100,000 in Student Loans Within 2 Years.

Key Components of an IPS

An effective IPS should include the following key components:

1. Introduction
   • Purpose of the IPS
   • Investor’s background and financial situation
2. Investment Objectives
   • Specific, measurable goals (e.g., retirement savings, education funding)
   • Time horizons for achieving these goals
3. Risk Tolerance
   • Assessment of your risk tolerance level
   • Description of how risk will be managed
4. Asset Allocation
   • Target asset allocation (e.g., percentage of stocks, bonds, cash)
   • Rationale for chosen allocation
5. Investment Selection Criteria
   • Criteria for selecting investments (e.g., types of securities, sectors, geographic regions)
   • Guidelines for diversification
6. Monitoring and Rebalancing
   • Frequency of portfolio reviews
   • Procedures for rebalancing to maintain target allocation
7. Performance Evaluation
   • Benchmarks and metrics for evaluating investment performance
   • Process for reviewing and adjusting the IPS
8. Responsibilities
   • Roles and responsibilities of the investor and any advisors or managers

Sample Investment Policy Statement (IPS)

Here’s a sample IPS to illustrate how these components come together:

Introduction

The purpose of this Investment Policy Statement (IPS) is to establish guidelines for the management of John Doe’s investment portfolio. John Doe is a 35-year-old professional with a stable income and moderate risk tolerance. This IPS will provide a disciplined approach to investing to achieve long-term financial goals.

Investment Objectives

• Retirement: Accumulate $1,000,000 by age 65.
• Education: Save $200,000 for children’s education expenses over the next 18 years.

Risk Tolerance

John Doe has a moderate risk tolerance. The portfolio will be managed to balance growth with the preservation of capital, recognizing that short-term market fluctuations are acceptable in pursuit of long-term goals.

Asset Allocation

• Equities: 60%
  • Domestic Stocks: 40%
  • International Stocks: 20%
• Bonds: 30%
  • Government Bonds: 15%
  • Corporate Bonds: 15%
• Cash/Cash Equivalents: 10%

Investment Selection Criteria

Investments will be chosen based on the following criteria:

• Stocks: Preference for large-cap and mid-cap stocks with strong growth potential and solid fundamentals.
• Bonds: Focus on high-quality, investment-grade bonds to manage risk.
• Diversification: Aim to diversify across sectors and geographic regions to reduce risk.

Monitoring and Rebalancing

The portfolio will be reviewed quarterly to assess performance and adherence to the target asset allocation. Rebalancing will occur annually or when any asset class deviates by more than 5% from its target allocation.

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