Preparing Your Invesment Policy Statement (IPS)

An investment policy statement is a document that an investor can use to convey his wishes to a portfolio manager. This document can be very beneficial in your retirement planning, and you should definitely consider filling one out. Here are the basics of the investment policy statement and how to prepare one.

Investment Policy Statement

The investment policy statement is a document that will be filled out when you start working with a portfolio manager. This document is going to help convey to your investment manager exactly what you want to accomplish. You will go over your goals and your individual investment objectives. This way, the investment manager is going to know how to craft a portfolio to fit your needs.

Risk Tolerance

One area that will be covered in the investment policy statement is your level of risk tolerance. The investment manager is going to want to know exactly how much risk you can handle. Depending on your level of risk tolerance, the investment manager is going to select a certain type of investment mix for you.

Asset Allocation

Another area that will be covered in your investment policy statement is the asset allocation of your portfolio. The asset allocation deals with how much money from the portfolio is going to be allocated to specific investments. For example, a certain percentage of your portfolio might be made up of stocks, another percentage made up of bonds and the rest made up of mutual funds. This asset allocation may be a temporary arrangement. You may specify that it changes to become more conservative as you get closer to retirement age. This will typically tie in with your risk tolerance as well. Those that have a higher tolerance for risk will typically choose a portfolio that is more heavily weighted towards stocks.

Liquidity Requirements

Your investment policy statement is also going to cover your individual liquidity requirements. Some investments are more liquid than others. You need to specify in this statement how quickly you would need to get your money back if you wanted to cash out your investments. Some investments might take some time before they can pay you back. Others will provide you with the cash that you need the same day.

Objective

One of the most important parts of the investment policy statement is your objective in investing. You want to clearly write out exactly what you plan on accomplishing by investing. This is typically going to include a definitive statement that explains what you are trying to do. For example, your investment policy statement might say that you want to have investments that provide you with $100,000 of income every year by the time you reach the age of 50. You can also specify that the money be indexed for inflation so that you will receive the amount of money in the future that would equal $100,000 in today's dollars. 

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