What Is an Investment Policy Statement?
An Investment Policy Statement is the written plan behind a portfolio. It defines what the money is for, how much risk it can take, which investments are allowed and when the strategy should be reviewed.
When we invest, it is common to start with the question: “What should I buy?”
An Investment Policy Statement proposes starting with a different one: “What do I want to achieve with this money?”
Known as an IPS, this statement has long been used by funds, foundations and institutional investors to set the rules that guide investment decisions. For individual investors it can play exactly the same role: turning objectives and constraints into a plan that can be followed over time.
The plan first, the investments second
Financial markets are constantly changing. A portfolio can rise for months and lose a significant part of its value in a matter of weeks.
It is precisely at those moments that a written plan matters.
An IPS helps to:
- Set clear objectives, such as preparing for retirement, buying a home or building long-term wealth.
- Establish the appropriate level of risk, given the financial situation and the time horizon.
- Define rules, such as the asset allocation, the permitted instruments and when to rebalance the portfolio.
- Reduce emotional decisions, by creating a reference for periods of higher volatility.
The aim is not to prevent change. It is to make sure that changes happen because the plan or the investor’s situation changed, not simply because the market did.
What should it include?
An IPS does not need to be a long document. It should contain the information needed to guide the main decisions.
It normally includes:
Objectives. What the money is for, how much is needed and when it will be needed.
Required return. What growth the portfolio needs to achieve to support those objectives, taking into account factors such as inflation and planned contributions.
Risk. How much risk the investor can financially withstand and how much they are willing to accept. These are two different measures, capacity and willingness, and we covered both in Understanding Your Risk Tolerance.
Constraints. Liquidity needs, tax situation, time horizon and other conditions that must be respected.
Allocation and instruments. How much to invest in each asset class, which instruments may be used and what limits apply.
Rebalancing and review. When and how the portfolio should return to its target allocation, and in which situations the plan should be reviewed.
The idea is simple: before choosing the investments, define the rules by which those investments will be chosen.
A simple example
Imagine a couple aged 42 who intend to retire in 15 years.
They have €100,000 invested, a home with a mortgage and two children. They want to build enough wealth to supplement their retirement and commit to investing regularly.
Their IPS could define:
- a 15-year horizon;
- an annual return objective;
- an emergency reserve kept separate from the portfolio;
- a maximum acceptable loss (for example, that a fall of more than 25% in any 12-month period would be intolerable);
- a preference for low-cost ETFs and funds;
- a strategic allocation between equities and bonds;
- annual rebalancing;
- a review of the plan whenever a relevant financial change occurs.
If, a few years later, one of them changes jobs or a significant family expense arises, the statement can be reviewed.
What should not happen is changing the whole portfolio simply because the market fell.
From the statement to the portfolio
An IPS turns abstract objectives into concrete rules, and it is the document that guides the construction, monitoring and review of a portfolio over time.
In PortfolYou, the Investor Profile tool helps you take the first step. From your questionnaire answers, it produces a personalised Investment Policy Statement in six sections:
Who you are, your stage of life, your main financial objectives and your time horizon.
Tolerance, capacity and perception of risk, the maximum drawdown you can accept, and where they disagree.
Four behavioural measures from the questionnaire and the biases worth monitoring.
The weight of each asset class, why, and a ±5% tolerance band around each target.
When and how to rebalance, and the types of instrument that fit the profile.
Four concrete, prioritised actions, each with a suggested timing.
It is a starting point, not a final document. As the financial situation and the objectives change, the plan should follow.
Investing with a plan is different from simply investing
An IPS does not predict the future and does not eliminate risk.
It serves a more practical purpose: deciding in advance how to make decisions when the future is uncertain.
When markets rise, it helps to avoid decisions driven by overconfidence. When they fall, it helps to remember why the portfolio was built the way it was.
In the end, a good statement does not say that the strategy should never change.
It says that, when it does, there should be a good reason for it.
Adapted from the four-part series on the Investment Policy Statement: “Declaração de Política de Investimento: definição e a sua importância”, “Objetivos de investimento, risco e retorno na IPS”, “Preferências e restrições do investidor na IPS” and “Exemplo e alterações à Declaração de Política de Investimento”, originally published on the Future Proof blog.