How the Investment Policy Statement (IPS) Keeps You on Course


How the Investment Policy Statement (IPS) Keeps You on Course


“I’m going to give you contracts. If you sign and honor your side of them, we are going to be successful… Starting today you will play like winners, act like winners, and most importantly— you will be winners. If you listen and learn, you’ll win basketball games. And gentlemen, winning in here is the key to winning out there.”

Such were the lines expressed by distinguished actor Samuel L. Jackson’s character in the 2005 MTV-produced movie Coach Carter. In the movie, his son who joined the team signed the contract as well, which required the athletes to follow a set of school responsibilities including maintaining a 2.3 GPA and 10 hours of community service.

Here we see two sides committed to contributing their skills for one common goal: winning. Of course, the possibility of losing was also calculated. However, they are working toward minimizing the risk of losing. Profits and losses were taken into consideration, but the focus is still on winning.

This is also the objective of an IPS, or Investment Policy Statement: it helps you stay on course and focus on your goals. While the absence of losses is not guaranteed in investing, an IPS helps you define your financial objectives and risk tolerance.

Basic Sections of an Investment Policy Statement (IPS)

One problem most people have when it comes to managing their assets is the lack of direction. An Investment Policy Statement is a must for all investors. It is not only for the most knowledgeable individuals with solid investing experience. You must take hold of this document, which can go to as much as 15 pages long, whatever your wealth management skill level may be.

It is the closest thing you have in writing that reflects your investment strategy. It is your guide to staying disciplined and focused with your savings and investment plans.

Who Creates the IPS?

They can be from the department in your organization assigned to creating the employees’ retirement plans. They can be your Life Insurance Advisor. They can be your Financial Planner. Just make sure they are either authorized or licensed to give you the money advice that you need. Alternatively, you can create your own IPS if you learn to understand it well.

1st Section of the IPS

The first section of an Investment Policy Statement is your financial account information. You should know in which accounts you would want your financial assets allocated and how much you are willing to contribute to these accounts. Take a look at how you should strategize your IRAs, 401k’s, annuities, long-term health care, etc. Here you can also identify which of your accounts have preferable tax treatments. You must have a clear idea of how much you are paying in taxes.

2nd Section of the IPS

The second section of an Investment Policy Statement puts more emphasis on your financial objectives, risk tolerance, and investment constraints.
Are you nearing retirement or about to retire? In this case, you must have a clear sight of your short-term financial goals.

Are you new in the workforce or in your 30s? Then your time horizon is still vast and leaning toward long-term investments will benefit you.

While this section looks into how you can grow your money in a specific timeline, it also looks into your risk tolerance and answers questions such as, “How much can you afford to lose if another 2008-like recession occurs?”
We’ll talk about your investment constraints in the next article.

3rd Section of the IPS

The third section of an IPS shows your target asset allocation. Questions like “how much should I allocate to stock vs. bonds in my margin account?” or “what regions in the world should my money be invested in?” are addressed. Your desire for these allocations to be changed at any given point in time is also highlighted. Would you like to change the details of your allocations semiannually, or yearly, or every two years? These among others are all squeezed in the asset allocation section.

Last Section of the IPS

The last section in a basic Investment Policy Statement highlights the monitoring and control procedures for your investment portfolio. How frequently would you want your assets re-balanced? How will the portfolio reviews be processed? What are the determining factors for the positive performance of your individual accounts? This section should also look into areas that will help you assess whether the losses you incur are within your acceptable levels.

Final Thoughts

Once you have an investing plan and your goals are written in your IPS, you will have a clear idea of how much money you’d want to have by retirement. Or, you can figure out how much you ought to be saving today to have the home down payment you need two years from now. Another perspective is you now have a clear view of how much you should be earning and setting aside today to have more than enough money for your three-year-old’s college tuition in the future.

If Coach Carter was able to have his players sign a contract with provisions for them to fulfill so they can win basketball games, there is no reason for you not to commit yourself to a contract: a contract that will have you win in money management so you can have a comfortable lifestyle for yourself and your family.