Why an Investment Policy Statement is Essential for Your Financial Future (2024)

Investing your money is one of the best ways to grow your wealth and secure your financial future. However, investing can be a complex process, and making the wrong decisions can lead to financial loss.

That's where an Investment Policy Statement (IPS) comes in. In this article, we'll discuss the definition of IPS, its features, and how it differs from a financial plan.

One of the primary reasons why an IPS is essential for your financial future is that it helps you to stay focused on your investment goals. When you have a well-defined investment objective and a roadmap to achieve it, you are less likely to get swayed by market fluctuations or rumours.

An IPS helps you to avoid impulsive investment decisions and stick to your investment plan, thereby ensuring that you achieve your financial goals.

An IPS is a written document that outlines an individual's or organization's investment objectives, constraints, and strategies. It is a roadmap that guides the investment decision-making process. An IPS typically includes the following components:

• Investment Objectives: This section outlines the investor's goals and objectives, such as generating a certain level of return or funding a specific financial goal. By clearly defining your financial goals, you can make informed investment decisions that are in line with your long-term objectives.
• Risk Tolerance: Determine your risk tolerance level and include it in your IPS. This will help you decide what kind of investments you should consider and how much risk you can tolerate.
• Asset Allocation: Define your asset allocation strategy in your IPS. This will help you decide what percentage of your portfolio should be allocated to different asset classes such as equities, fixed income, and alternative investments.
• Investment Selection: Choosing suitable investments can have a significant impact on long-term growth potential. It’s essential to research each security before investing so that you know what kind of return you can expect based on past performance as well as its current valuation relative to competitors within its sector or industry groupings.
• Fine print: Pay close attention to the fine print when creating your IPS. This includes fees, commissions, and other costs associated with your investments. Make sure you understand what you are paying for and how it will impact your returns.
• Investment Strategies: This section sets out the guidelines for selecting and monitoring investments, including criteria for selecting individual securities or mutual funds, and guidelines for monitoring the portfolio's performance.

An IPS has several key features that make it a valuable tool for investors. Some of the most important features are:

• Clarity: An IPS provides clear and concise guidance on the investor's goals, objectives, and strategies.
• Consistency: An IPS helps investors maintain consistency in their investment decisions and avoid making impulsive or emotional choices.
• Accountability: An IPS holds investors accountable for their investment decisions and provides a framework for evaluating performance.
• Flexibility: An IPS can be updated and revised as the investor's goals, objectives, or circ*mstances change.

It's important to note that an IPS is not the same as a financial plan. A financial plan is a comprehensive document that outlines an individual's or organization's entire financial picture, including income, expenses, assets, liabilities, and goals.

An IPS, on the other hand, is a specific document that focuses solely on investment goals, strategies, and constraints and also helps you to determine your risk tolerance and asset allocation, which in turn helps you to build a well-diversified portfolio.

A well-diversified portfolio helps to reduce the overall risk of your investments and ensures that your investments are aligned with your risk tolerance.

Parting Words

In conclusion, an IPS is an essential tool for anyone who wants to invest their money wisely and achieve their financial goals. It provides clear guidance on investment objectives, risk tolerance, asset allocation, and investment strategies.

By having an IPS, investors can maintain consistency, accountability, and flexibility in their investment decisions.

In the market, where the investment landscape is constantly evolving, having an IPS can help investors navigate the market with confidence and achieve long-term financial success.