An investment policy statement (IPS) is a document that outlines the investment objectives, constraints, and guidelines for a specific investment portfolio. It is used by investment professionals to ensure that investment decisions are aligned with the client’s financial goals and risk tolerance.
The CFA Institute provides a template for an investment policy statement that can be used by CFA charterholders. This template includes sections on the following:
Investment Objectives
The investment objectives section of an IPS should state the specific financial goals that the investment portfolio is intended to achieve. These goals may include things like generating income, growing capital, or preserving wealth. The investment objectives should be specific, measurable, achievable, relevant, and time-bound.
For example, an investment objective might be to “generate an annual return of 6% over a five-year period.” This objective is specific, measurable, achievable, relevant to the client’s financial goals, and time-bound.
The investment objectives should be reviewed and updated regularly to ensure that they are still aligned with the client’s financial goals and risk tolerance.
Investment Constraints
The investment constraints section of an IPS should identify any restrictions that apply to the investment portfolio. These constraints may include things like the client’s risk tolerance, investment horizon, or liquidity needs.
For example, a client with a low risk tolerance may have a constraint that limits the portfolio’s exposure to high-risk investments. A client with a short investment horizon may have a constraint that requires the portfolio to be invested in liquid assets.
The investment constraints should be reviewed and updated regularly to ensure that they are still relevant to the client’s financial situation.
Investment Guidelines
The investment guidelines section of an IPS should provide specific instructions on how the investment portfolio will be managed. These guidelines may include things like the asset allocation, investment style, and risk management techniques that will be used.
For example, an investment guideline might state that the portfolio will be invested in a 60/40 stock/bond allocation. Another guideline might state that the portfolio will use a value investing style. A third guideline might state that the portfolio will use stop-loss orders to manage risk.
The investment guidelines should be reviewed and updated regularly to ensure that they are still appropriate for the client’s financial goals and risk tolerance.
Conclusion
An investment policy statement is an essential tool for investment professionals. It helps to ensure that investment decisions are aligned with the client’s financial goals and risk tolerance. The CFA Institute provides a template for an investment policy statement that can be used by CFA charterholders.
By following the steps outlined in this article, you can create an investment policy statement that will help you to achieve your financial goals.
