The Power of Creating an Investment Policy Statement

Most individuals do not have a formal investment policy statement (IPS) that clearly states their investment objective. They may be looking for growth or income. They may have filled out a risk tolerance questionnaire or chose a moderate or conservative portfolio strategy, but they have not spent time on identifying what their objective is and how that objective ties into their long-term financial plan.

Now we are 10+ years into a bull market which helps people forget the importance of an IPS, but we have had increased volatility over the last few years and while everyone knows the goal is to buy low and sell high we also know the average investor is not rational. They make the wrong decisions at the wrong time because of emotions. In fact, the greatest reason to work with an investment advisor is to have an objective viewpoint and have some one to talk you out of making irrational decisions. Along with working with an advisor a great way to avoid making irrational decision is to prepare an IPS with detailed investment objectives and review that policy during times of market volatility.

The IPS should remind you of your objectives and why you chose those investments to begin with. You can then rationally and objectively decide if anything has changed in your situation that warrants an update to the IPS, the detailed objectives and therefore your portfolio. Or perhaps the review of the IPS reminds you that your long-term outlook hasn’t changed and therefore even though the market, or your investments are not having a great quarter or year the long-term outlook of your IPS and your portfolio still align. Market volatility and pullbacks are healthy and instead of creating a panic where you sell or buy investments at the wrong time the volatility and pullbacks can provide a buying opportunity or a rebalancing opportunity or a tax sheltering opportunity. The point being that you are creating the IPS, aligning it with your long-term financial plan and detailing the objectives so that you can make rational decisions with your investments.

These are general statements and may not apply to your individual situation. You should always consult your CPA, Investment Advisor or other professional to see how this relates to you.