Drew Barnes, CFP®

Head of Financial Planning

All investors want their portfolio to perform as well as possible.  However, not all portfolios are constructed equally.  Every investor has differing time horizons, appetites for investment risk, and needs for their portfolio to meet their financial goals.  Add in the ever-evolving complexities of the economy and the capital markets, it is difficult to know where to start and how to handle these ongoing challenges over time.

Since the year 2000, we’ve experienced three recessions: the dot-com bubble bursting in the early 2000s, the Great Financial Crisis of 2008, and the global pandemic induced recession in 2020.  We have also endured four bear markets (a decline in the stock market of 20% or more) over that time: March 2000 – October 2002, October 2007 – March 2009, February 2020 – March 2020, and January 2022 – October 2022.  Amid all this volatility and uncertainty, a well-documented Investment Policy Statement can be the key to and investor and their advisor meeting long-term goals.

What is an Investment Policy Statement (IPS)?

An investment policy statement is a document that outlines a prudent and acceptable investment philosophy, defines the investment management procedures, and incorporates the long-term goals and risk tolerance for the investor.  An IPS also documents the roles and responsibilities of all parties involved in managing the investment portfolio.  This document serves as the blueprint and roadmap to successful investing within the guidelines set for their personal portfolio.

What is the need for a documented IPS?

The principal reason for developing a documented long-term investment policy is to enable an investor and their advisor to protect the investor’s portfolio from impromptu and impulsive revisions of prudent, long-term investment management.  An IPS helps to maintain a long-term focus when short-term market volatility may be distressing and cause doubt in the policy.  The goal of a written IPS is to increase the likelihood that the long-term strategy for the portfolio is followed, which increases the probability that the financial needs and goals of the investor are met.

An IPS will establish a clear understanding between the investor and their advisor of their respective responsibilities, as well as the expectations, objectives, and guidelines for the investor’s portfolio.  Additionally, the IPS will create the framework for a well-diversified mix of asset classes that can be expected to generate acceptable long-term returns.  This will include describing an appropriate risk posture and specifying the target asset allocation policy for the investor’s portfolio. 

Finally, an IPS should discuss the tax policy for the portfolio and procedures around strategies like rebalancing, etc.

Putting it all together

In our world of wealth management and financial planning, ideally the investor will have completed a comprehensive financial plan to determine what they require out of their portfolio to meet their needs and goals.  This planning, married with the investor’s time horizon and personal risk tolerance, will allow the advisor and investor to agree upon the right IPS.  A financial plan should account for the variability of investment returns and volatility of a portfolio, and what kind of portfolio will most likely endure and provide strong probabilities of success.  The results of financial planning will hopefully instill confidence in the investor to follow their IPS through all the ups and downs that come with investing.  Lastly, it is important to revisit the guidelines set in an IPS periodically as life circumstance and risk tolerances can shift over time.

In summary, an Investment Policy Statement is an important tool for successful long-term investing and reaching one’s goals. It provides clarity, establishes consistency and discipline, promotes accountability, and facilitates communication and collaboration.  

Investment advisory services are offered through Traction Financial Partners, LLC, a Registered Investment Adviser. The views expressed represent the opinion of Traction Financial Partners, LLC. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment.