An investment policy statement (IPS) is an important document that outlines the objectives, guidelines and constraints for investing. With a proper IPS, investors can make more informed decisions aligned with their goals. This article provides a step-by-step guide to creating an effective investment policy statement template using Word.
First, determine your financial goals and risk tolerance. Be specific about your return objectives, liquidity needs, tax considerations and time horizon. This provides the foundation for your IPS. Next, specify your asset allocation guidelines, including the asset classes you will invest in and the percentage target for each. Make sure your asset allocation matches your risk tolerance.
You’ll also want to establish rebalancing guidelines to keep your asset allocation on track. Decide on the frequency and thresholds for rebalancing. Common choices are quarterly or when allocations drift 5-10% from targets. Also specify eligible investments, such as mutual funds, ETFs and stocks. List any restrictions too.
Furthermore, set monitoring and review procedures. State how often you will evaluate performance and revisit the IPS. Annually or quarterly are typical frequencies. You may also want to define steps to take if objectives are not met, like changing asset allocation.
Using Word, you can easily create a nicely formatted IPS template incorporating these key elements. Make sure to be thorough yet concise. An IPS provides the discipline to guide your investment decisions, so be sure to follow it closely once implemented.
Determine Your Goals and Risk Tolerance for a Strong Foundation
The first step in creating an effective investment policy statement is clearly defining your goals and risk tolerance. Be specific about factors like:
– Target returns – What annual, 5-year or other return goals do you have? This may vary by portfolio.
– Time horizon – What is the timeframe for achieving your goals? Short term vs long term horizons may dictate different strategies.
– Income needs – Do you require regular income from your investments? This can impact asset allocation.
– Tax considerations – Are you aiming to minimize taxes or maximize after-tax returns?
– Liquidity needs – How accessible do you need your funds? More liquid assets may be preferred.
– Risk tolerance – What loss levels are you willing to accept? More conservative investors will need a different strategy.
With your goals and risk tolerance precisely outlined upfront in your IPS, you create a foundation for guiding all investment decisions.
Specify Your Asset Allocation Guidelines Aligned with Goals
A key section of the investment policy statement template in Word covers asset allocation guidelines. This specifies what asset classes you will invest in and the target percentage or range desired for each.
Popular asset classes to consider are:
– Stocks – Higher risk but with potential for greater returns over the long run.
– Bonds – Typically lower risk than stocks and can provide steady income.
– Cash – Very low risk but yields minimal returns. Good for short-term needs.
– Real estate – Can provide diversification along with regular income.
– Alternatives – Includes options like commodities, hedge funds and private equity.
Come up with an asset allocation that aligns with your risk tolerance and return objectives outlined earlier. More conservative investors may favor more bonds and cash, while more aggressive investors may tilt towards stocks. Revisit this annually.
Define Your Rebalancing Rules to Stay on Track
The percentages allocated to each asset class will drift over time as some investments outperform others. Rebalancing realigns the portfolio back to the original targets per the IPS.
As part of your investment policy statement template, specify:
– How often rebalancing will occur – Typical choices include quarterly, semiannually or annually.
– The thresholds required to trigger rebalancing – For example, if allocations stray 5% or 10% from their targets.
– The assets to sell and purchase during rebalancing – Lay out the priorities for what gets bought and sold.
– Any tax considerations – Rebalancing can trigger capital gains/losses so consider the tax efficiency.
Sticking to the rebalancing rules keeps your asset allocation aligned with your goals over the long haul. Review rebalancing guidelines annually in case adjustments are needed.
Outline Your Eligible Investments and Restrictions
The investment policy statement should detail what specific investment vehicles are permitted. Popular examples include:
– Mutual funds – Professionally managed portfolios offering diversification. Index funds provide low-cost exposure.
– ETFs – Similar to mutual funds but trade intraday like stocks. Also mostly index-based.
– Individual stocks – For picking securities, require rigorous analysis.
– Bonds – Include government, corporate and municipal bonds.
– CDs and money market funds – For cash holdings and liquidity needs.
Any restrictions around investments like limit on individual stock holdings as a percentage of total portfolio should also be documented. The IPS keeps your future investing decisions within the guardrails.
Define Monitoring, Evaluation and Updating Procedures
The final key component of the investment policy statement template covers how you will monitor progress and keep the IPS updated over time. Be sure to address:
– Frequency of evaluating performance – How often will you review actual returns versus goals and benchmarks? Quarterly or annually are common.
– Metrics for comparing performance – Will you use total return, risk-adjusted return, alphas, etc?
– Thresholds for making changes – If underperforming, what is the decision process for changing managers or allocations?
– IPS review frequency – How often will you revisit the IPS to adjust allocations, goals or other guidelines? Annually works for most.
– Documentation and approval process – What are the steps for officially updating the IPS if changes are made?
Careful monitoring and reviews will ensure your investment policy statement stays current. Follow the procedures outlined to guide future decisions.
Creating an investment policy statement using a Word template provides the structure to make smart investment decisions aligned with your goals. Carefully outline your objectives, asset allocation, rebalancing guidelines, eligible investments and review procedures. Follow the IPS diligently once implemented for optimal results. Review it annually to keep it updated. An IPS brings discipline to investing.