The Introduction Guide to Investment Policy Statement (IPS)

Definition of an Investment Policy Statement (IPS)

An investment policy statement (IPS) can be referred to as a document drafted between a portfolio manager and your investing roadmap, outlining your financial goals and strategies with guidelines for achieving them.

Then it will help you stay on the right path as you move forward, and specific information on matters such as asset allocation, risk tolerance, and liquidity requirements are included in an investment policy statement. 

An investment policy statement can be as straightforward or as complex as you wish, as it provides an overall vision of your investment strategy and holdings.

Breaking Down Investment Policy Statement 

This aspect revealed how IPS are frequent but are not always used by investment advisors and financial advisors to draft an investment plan with a client.

It also guides informed decision-making and serves as both a roadmap to successful investing. However, a well-devised investment policy statement that contains only actionable provisions that are intended to be followed can help advisors “talk down” clients willing to change direction with their portfolio whenever markets start to falter.

Investment Policy Statement Features 

Investment policy statement
Investment policy statement

A well-conceived investment policy statement establishes a systematic review process that enables the investor to stay focused on the long-term objectives and specifies its goals, priorities, and investment preferences.

The investor list out the investment objectives along with his time horizon. However, special attention should be given to revealing the investor’s risk or return profile, including naming asset classes that should be avoided and naming preferred asset classes.

The example revealed that an individual might have an IPS stating that his job should probably become optional by the time he is 60 years old.

Importance of investment policy statement

This is about the IPS that communicates a client’s investment goals and the strategies that will serve as guideposts for managing the portfolio.

It involves the good, the bad, and the ugly among them. These include:

The Good investment policy statements:

  • It provides appropriate guidance on portfolio constructions.
  • It helps maintain focus on the client’s mandate and avoids deviations because of changing market conditions.
  • It serves as a critical tool in keeping clients focused on their stated objectives.

Wrong investment policy statements:

Investment policy statement
  • Are written to satisfy compliance or regulatory requirements solely.
  • Are vague and fails to be integrated into the portfolio construction and management process.
  • Provide no means of testing the success or effectiveness of the portfolio design to actual results.

Ugly investment policy statements:

  • They are crafted in broad terms that similarly stated objectives could have drastically different interpretations from one client to others.
  • Leave a client comparing portfolio performance to market and asset-class benchmarks that may or may not have relevance to the client’s stated objectives.

Furthermore, an IPS is written with broad investment objectives and risk descriptions, such as “low risk” and “conservative growth.” Meanwhile, these factors would translate into an asset allocation on standard deviation, correlation, and expected returns and may attempt to solve qualitative interpretations of risk and return into statistical metrics.

The way investment policy statement is being used depends on whether or not one is working within a modern or post-modern portfolio context.

While in modern portfolio theory, construct, assessing portfolio strategy and portfolio results is often a highly subjective and intangible exercise between client and advisor.

Ideally, an effective IPS incorporates two essential and interrelated components: an outline of the client’s quantitative and qualitative objectives and a set of metrics for the accurate evaluation of the portfolio’s construct, including appropriate return and risk measures.

Rehearsing outcome-based investing with an investment policy statement built around a single metric that incorporates various aspects of risk rather than a single element of risk.

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