Question

Please write IPS ( investment policy statement) for yourself in the following step 1-6.

Step 1: Document your goal

Step 2: Outline your investment strategy.

Step 3: Document current investments.

Step 4: Document target asset allocation.

Step 5: Outline investment selection criteria.

Step 6: Specify monitoring parameters.

Answer 1

An investment policy statement (IPS) is a document drafted between a portfolio manager and a client that outlines general rules for the manager. This statement provides the general investment goals and objectives of a client and describes the strategies that the manager should employ to meet these objectives. Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements are included in an investment policy statement.

Investment policy statements are frequently — though not always — used by investment advisors and financial advisors to document an investment plan with a client. It provides guidance for informed decision-making and serves as both a roadmap to successful investing and a bulwark against potential mistakes or misdeeds. A well-devised IPS that contains only actionable provisions that are intended to be followed can help advisors "talk down" clients who want to drastically (and potentially harmfully) change direction with their portfolio when markets start to falter.

Step 1: Document your goals.
Documenting your goals might seem straightforward, but there's more to this section than meets the eye. We tackled quantifying and prioritizing goals earlier in our special report.

Quantifying how much you'll need for retirement is particularly complex, requiring you to forecast not just unknowables such as your life expectancy and rate of investment return, but also to factor in your own variables, such as how your spending might change in retirement and whether you have nonportfolio sources of income such as a pension. Tools such as T. Rowe Price's retirement income calculator can help you come up with a realistic estimate of your goal amount, as well as a target savings amount.

Step 2: Outline your investment strategy.
We've only left a few lines here, and that's by design: The idea is to be succinct.

An investment strategy for accumulators, for example, might be "To invest primarily in low-cost index funds, increasing contributions along with salary increases. Begin with an 80% equity/20% bond mix, transitioning to 60% equity/40% bond by retirement."

An investment strategy for retirees might be "To invest in dividend-paying equities and bond mutual funds to deliver a baseline of income; regularly rebalance to provide additional living expenses. Target a 50% bond/50% stock mix."

Step 3: Document current investments.
Here you're documenting all of your accounts of a given type, as well as their most recent values. While our template requires you to amalgamate all of your accounts of a given type--the IRAs for both you and your spouse, for example--you can append pages to create a more granular view of your holdings.

Step 4: Document target asset allocation.
If your first thought is, "But I don't have a target asset allocation!" let this section be your impetus to arrive at one. This article walks through the key variables to consider when setting your portfolio's asset allocation for retirement. This one tackles asset allocation for college, and this article discusses how to allocate assets for shorter-term goals (it also includes some sample short- and intermediate-term portfolios).

Because your portfolio's actual asset allocation is going to bump around a bit based on market performance (and, perhaps, active asset allocation decisions from you or your fund manager), it's sensible to express your target allocations to each asset class as a range rather than a specific target. If your range for equities is 65% to 75%, for example, that means you'll rebalance when your equities weighting goes below 65% or above 75%. For the major asset classes, a range of no fewer than 5 and no more than 10 percentage points is sensible.

Setting your allocations to U.S. stocks, foreign stocks, bond, and cash is the main job here. But for investors who would like to embed "tilts" into their portfolios--toward small-cap or emerging-markets equities, perhaps--we've also included lines for you to specify how much you'll dedicate to each of these sub-asset classes.

Step 5: Outline investment selection criteria.
Use this area to specify the characteristics that you'll look for in each investment type (and that you'll hold them to, on an ongoing basis). For example, you might specify that each of your equity holdings rate at least 3 stars, or that your mutual funds must all be rated Bronze or better. (Morningstar's analyst-driven ratings, whether star and moat ratings for equities or analyst ratings for mutual funds, are good variables to include among your monitoring criteria because they take into account multiple factors.)

You needn't specify parameters for each of these areas included on our template--for example, if you invest exclusively in index funds, you'd skip the sections related to management tenure and might instead specify that your holdings should each have expense ratios of less than 0.20% per year.

Step 6: Specify monitoring parameters.
Implicit in outlining all of the above policies--from asset allocation to investment-holding specifics--is that you'll periodically check in on your portfolio to ensure that it still passes muster.

In this section, you'll specify how often you'll check up on your portfolio. Less is more, in my view, which is why the maximum monitoring frequency included here is monthly. You'll also outline when you'll rebalance. Rather than rebalancing at specific time periods, I recommend rebalancing only when exposure to the major asset classes is 5 or 10 percentage points from the targets. (If you've set target ranges for your asset allocation in the section above, that will determine your response in this section.)

And because the best portfolio checkups are focused, it's best to specify what you'll look for as you review your portfolio. I like to start by focusing on the most important variables, like whether the portfolio is on track to meet its goals and whether its asset allocation is in line with the target range. Then, if time permits, you can focus on smaller-bore issues, such as your portfolio's performance relative to a benchmark with like-minded asset allocations. (This article discusses how to set up such a benchmark.)