• Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer

Optimized Portfolio

Investing and Personal Finance

  • Beginners Start Here
  • Investing 101
    • Beginners Start Here – 10 Steps To Start Building Wealth
    • What Is the Stock Market? How It Works & How to Invest in It
    • How To Invest in an Index Fund – The Best Index Funds
    • Portfolio Asset Allocation by Age
    • How To Invest Your Emergency Fund
    • Portfolio Diversification – How To Diversify Your Portfolio
    • Dollar Cost Averaging vs. Lump Sum Investing (DCA vs. LSI)
    • How To Invest Your HSA (Health Savings Account)
    • Factor Investing and Factor ETFs – The Ultimate Guide
    • more…
  • Lazy Portfolios
    • All Weather Portfolio
    • Bogleheads 3 Fund Portfolio
    • HEDGEFUNDIE’s Excellent Adventure
    • Warren Buffett Portfolio
    • Golden Butterfly Portfolio
    • Paul Merriman Ultimate Buy and Hold Portfolio
    • Ben Felix Model Portfolio
    • Permanent Portfolio
    • David Swensen Portfolio
    • 60/40 Portfolio
    • more…
  • Funds
    • VOO vs. VTI – Vanguard S&P 500 or Total Stock Market ETF?
    • The 7 Best International ETFs
    • The 8 Best Small Cap ETFs (4 From Vanguard)
    • The 5 Best REIT ETFs
    • The 5 Best EV ETFs – Electric Vehicles ETFs
    • VIG vs. VYM – Comparing Vanguard’s 2 Popular Dividend ETF’s
    • The Best Vanguard Dividend Funds – 4 Popular ETFs
    • The 5 Best Tech ETFs
    • The 7 Best Small Cap Value ETFs
    • The 6 Best ETFs for Taxable Accounts
    • The 5 Best Emerging Markets ETFs (1 From Vanguard) for 2023
    • more…
  • Leverage
    • What Is a Leveraged ETF and How Do They Work?
    • How To Beat the Market Using Leverage and Index Investing
    • The 9 Best Leveraged ETFs
    • Hedgefundie’s Excellent Adventure
    • Leveraged All Weather Portfolio
    • Leveraged Permanent Portfolio
    • Leveraged Golden Butterfly Portfolio
    • NTSX – Review and Summary
    • TQQQ – Is It A Good Investment?
    • PSLDX – A Review
    • SWAN – A Review
    • RPAR Risk Parity ETF Review
    • more…
  • Dividends
    • The Best M1 Finance Dividend Pie
    • The 11 Best Dividend ETFs
    • The Best Vanguard Dividend Funds – 4 Popular ETFs
    • VIG vs. VYM – Comparing Vanguard’s 2 Popular Dividend ETF’s
    • 8 Reasons Why I’m Not a Dividend Income Investor
    • QYLD – A Harsh Review
    • more…
  • Broker Reviews
    • The 5 Best Stock Brokers
    • The 4 Best Investing Apps
    • M1 Finance Review
    • Brokers with the Lowest Margin Rates
    • M1 Finance vs. Fidelity
    • M1 Finance vs. Vanguard
    • Webull vs. Robinhood
    • Stash vs. Robinhood
    • M1 Borrow Review (How M1’s Margin Loan Works)
    • more…
  • Retirement
    • The 10 Best ETFs for Retirement Portfolios in 2023
    • The 4% Rule for Retirement Withdrawal Rate – A Revisitation
    • Sequence of Return Risk in Retirement Explained
    • Traditional IRA Explained
    • Roth IRA Explained
    • 401k vs. Roth IRA
    • Roth IRA vs. Traditional IRA
    • Backdoor Roth IRA Explained
    • more…

How To Write an Investment Policy Statement – Template & Example

Last Updated: March 22, 2022 No Comments – 6 min. read

An investment policy statement is a formal document that defines one’s investing objectives and strategy. Here we’ll look at how to write one, the benefits of having one, a template, and an example.

Disclosure:  Some of the links on this page are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality, ad-free content on this site and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful, not because of the commission I get if you decide to purchase through my links. Read more here.

Contents

  • Introduction – What Is an Investment Policy Statement?
  • Benefits of Having an Investment Policy Statement
  • How To Write an Investment Policy Statement – An Outline
  • Investment Policy Statement Example
  • Investment Policy Statement Template
  • Conclusion

Introduction – What Is an Investment Policy Statement?

An investment policy statement is a document that outlines the parameters for how a portfolio will be managed and what its objectives are. They are used by portfolio managers of funds and between financial advisors and their clients.

The investment policy statement, or IPS for shorthand, keeps the investing strategy and its manager on the rails by setting guidelines within which the investment portfolio must be managed. Think of the IPS as just a formal investing roadmap written down in detail. Naturally, it contains information such as asset allocation, strategy, time horizon, goals, risk tolerance, monitoring procedures, review timelines, liquidity requirements, etc. The IPS also self-referentially specifies when and how the document itself can (and cannot) be changed in the future, such as updating for major shifts in income or lifestyle, and disallowing changes based on short-term market behavior.

Now let’s look at why you’d want to have an investment policy statement.

Benefits of Having an Investment Policy Statement

In the context of a portfolio manager or advisor-client relationship, the investment policy statement sets clear parameters that must be adhered to, such as asset types that can or cannot be bought in the portfolio, thereby establishing unwavering boundaries for the investment manager to work within. This provides clarity and peace of mind for the client and is one safeguard against misconduct. The document also provides a reference point for the manager to look back at anytime an investing decision is made, or for someone else to view to get a quick overview of one’s investing plan.

In the context of a DIY retail investor, writing an investment policy statement for oneself is not a common exercise, but it can be useful in a couple key ways. First, the exercise can provide a way to organize a collection of thoughts and ideas into an actionable investing plan, which is great for beginners who may be experiencing information overload.

Secondly, recognize that due to inherent biases from being human, investors are usually their own worst enemy. Investment plans typically fail due to investor behavior, not market performance. This can come in the form of detrimental things like performance chasing, emotionally reacting to short-term market noise, overconfidence, and loss aversion, to name a few.

As mentioned, having an investment policy statement at least provides one layer of insulation from emotionally-driven investing decisions because it must be consulted before action is taken. Any proposed changes must be squared with the stated objectives and parameters established within the IPS. If nothing else, it delays – and hopefully prevents – irresponsible action and helps investors keep their eyes on the prize in the far future. The IPS helps keep the investor focused on the long-term journey.

Without an investment policy statement, investors are prone to make emotional, reactionary, biased investing decisions such as the following:

  • Buying a stock or fund simply because they see everyone else is buying it, likely based on a recent run of outsized performance. This is called herding or performance chasing. (ARK, anyone?)
  • Buying or selling more of an asset than usual in anticipation of or during a market crash. This is called market timing, and it’s usually more harmful than helpful.
  • Similarly, shifting allocation due to recent market behavior. This is called recency bias.
  • Changing investing strategy after underperforming a popular index for some period of time, even though the strategy that underperformed is appropriate for the investor’s need, capacity, and tolerance for risk. This is called tracking error regret.
  • Buying or selling an asset after a well-known hedge fund manager says to. This is called authority bias.

As you can imagine, the value of the investment policy statement really shines during periods of market turmoil when there’s blood in the streets and your conviction and risk tolerance are tested in the face of uncertainty.

So now that we know why an investment policy statement can be useful, let’s look at how to write one.

How To Write an Investment Policy Statement – An Outline

This list is not necessarily exhaustive, but here are some pieces of information you’d probably want to include in your investment policy statement:

  • Where are the assets held? E.g. broker(s) like Vanguard or M1 Finance, crypto exchanges, TreasuryDirect.gov, a local credit union, etc.
  • What account types exist and how much is allocated to each one each year? E.g. HSA, Roth IRA, 401k, taxable account, etc.
  • Short-term goals and liquidity needs, e.g. emergency fund, downpayment for a house, new car, etc.
  • Long-term goals
    • retirement age
    • time horizon
    • value needed at retirement, likely based on a SWR estimate.
  • Subsequent need, capacity, and tolerance for risk.
  • Asset classes to include or exclude, e.g. U.S. stocks, international stocks, U.S. treasury bonds, savings bonds, gold, etc.
  • Security selection criteria and strategies to include or exclude, e.g. passive index funds, rules-based active funds, actively managed funds, options-based funds, etc.
  • Target asset allocation for different asset classes, e.g. stocks and bonds, and potential glidepath thereof (when it will change).
  • Target allocation ranges for specific assets and market segments, e.g. U.S. small cap value stocks, Emerging Markets, etc.
  • Rebalancing protocol, e.g. semiannually on January 1 and July 1.
  • Tax loss harvesting protocol.
  • Monitoring frequency.
  • Performance benchmark(s), if applicable.
  • Procedures that allow for future changes to IPS, e.g. changes in lifestyle, income, expenses, etc.
  • Delineation of things that cannot change IPS, e.g. short-term market behavior.

Investment Policy Statement Example

An investment policy statement for an institutional portfolio manager or between an advisor and a client will probably be polished and complicated and at least several pages long. For our purposes as DIY investors, it doesn’t need to be anything fancy; we can keep things pretty short and sweet and simple. This will save you time both writing it and revisiting it later to reference or update. So here’s a relatively simple example of what that might look like for the average investor.

Note that the following example is purely hypothetical and is for illustrative purposes only. It is not financial advice. It is not an indication of any sort of investing strategy. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned.

Roth IRA, HSA, and taxable brokerage account are at Schwab. Series I savings bonds reside at TreasuryDirect. Savings account is at Wells Fargo.

Attempt to max out contributions to tax-advantaged accounts annually. Contribute to taxable account after that. Keep emergency fund of 6 months' current expenses in savings account.

Primary objective is to retire at or before age 55. Estimated number to retire is $2 million based on an annual income in retirement of $80k and a SWR estimate of 4%.

Invest in passively managed market cap weighted index funds for global stocks, U.S. Treasury bonds, TIPS, and gold. Do not buy assets outside of these classes, including but not limited to actively managed funds, derivatives, derivatives-based funds, REITs, individual real estate investment properties, broad commodities funds, and individual stocks. Do not use leverage. Aim for lowest fees whenever possible. Try to allocate based on relative tax efficiency whenever possible. Do not hold gold in taxable space.

Asset allocation should follow the simple formula of [age minus 20] for fixed income allocation. At 5 years out from retirement, put half of fixed income allocation in TIPS. Maintain half of fixed income in TIPS during retirement. 5% of the portfolio should be allocated to gold at all times, via an index ETF tracking the spot price of gold bullion. Bond duration should be roughly matched to the investing horizon and should be adjusted every 1-5 years.

Current portfolio at age 30 is:
VT - global stock market - 85%
SGOL - gold - 5%
EDV - extended duration U.S. Treasury bonds (STRIPS) - 10%

Any change to these assets or allocations will require a 3 month waiting period unless a fund is liquidated by the fund provider and requires immediate replacement. 

Automate new contributions wherever possible. Invest all investable cash as soon as it becomes available. No DCA. No market timing. Rebalance annually around July 1.

Ignore short-term noise. Don't pay attention to headlines. Stay the course. Keep the long-term view. 

Any change to this investment policy statement will require a 6 month waiting period.

Investment Policy Statement Template

If you want to, you can use the investment policy statement example above as a template to write your own. I’ve included links for Google Doc and Plain Text (.txt) versions below.

Remember once again that this investment policy statement template is purely hypothetical and is for illustrative purposes only. It is not financial advice. It is not an indication of any sort of investing strategy. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. If using it as a template to write your own IPS, you must change the parameters to match your own personal goals, time horizon, strategy, risk tolerance, and other circumstances.

Google Doc

Plain Text (.txt)

Conclusion

While it may simply seem like a formality, an investment policy statement can prove extremely useful in times of uncertainty when you’re tempted to make emotional adjustments to your portfolio that will likely prove more harmful than helpful. The IPS can be as simple or complex and as vague or specific as you’d like. If nothing else, it serves as a robust reminder and a guidepost to keep your investing plan on track.

Do you have an investment policy statement? Are you considering writing one? Let me know in the comments.


Disclaimer:  While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.

m1 finance get started


Don't want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com.

77 percent of millenials report their finances are a source of anxiety

Related Posts

  • 9 Tips on How To Lower Your Car Insurance Premiums
  • Investing Risk Explained (My Take on Portfolio Risk & Volatility)
  • 5 Nuveen Funds for Targeted ESG Exposure in 2023
  • The Best (And Only) Airlines ETF for 2023
  • M1 Finance vs. Fidelity Brokerage Comparison [2023 Review]

About John Williamson

Analytical and entrepreneurial-minded data nerd, usability enthusiast, Boglehead, and Oxford comma advocate. I lead the Paid Search marketing efforts at Gild Group. I'm not a big fan of social media, but you can find me on LinkedIn and Reddit.

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Sign up to receive email updates when a new post is published.

Don't worry, I hate spam too. No ads.

  • Facebook
  • Instagram
  • Reddit
  • Twitter
  • YouTube
  • Patreon

Most Popular

Ray Dalio All Weather Portfolio Review, ETFs, & Leverage (2023)

HEDGEFUNDIE’s Excellent Adventure (UPRO/TMF) – A Summary

Golden Butterfly Portfolio Review and M1 Finance ETF Pie

David Swensen Portfolio (Yale Model) Review and ETFs To Use

Harry Browne Permanent Portfolio Review, ETFs, & Leverage (2023)

Corporate Bonds vs. Government Bonds (Treasuries) – The Showdown

VIG vs. VYM – Vanguard’s 2 Popular Dividend ETFs (Review)

Warren Buffett ETF Portfolio (90/10) Review and ETFs (2023)

The 60/40 Portfolio Review and ETF Pie for M1 Finance

Bogleheads 3 Fund Portfolio Review and Vanguard ETFs (2023)

m1 sidebar

visor sidebar

Paul Merriman Ultimate Buy and Hold Portfolio Review, M1 Pie (2023)

Lowest Margin Rates Brokers (2023 Comparison)

M1 Finance vs. Vanguard Brokerage Comparison [2023 Review]

M1 Finance vs. Fidelity Brokerage Comparison [2023 Review]

The Best M1 Finance Dividend Pie for FIRE & Income Investors

Portfolio Asset Allocation by Age – Beginners To Retirees

The 5 Best Stock Brokers Online for Investing (2023 Review)

The 4 Best Investing Apps for Beginners (2023 Review)

The 7 Best Small Cap ETFs (3 From Vanguard) for 2023

The 6 Best REIT ETFs To Invest in Real Estate for 2023

The 6 Best Tech ETFs To Buy Tech Stocks in 2023

9 Best Clean Energy ETFs To Go Green in Your Portfolio (2023)

The 13 Best Small Cap Value ETFs (3 From Vanguard) for 2023

Why, How, & Where To Invest Your Emergency Fund To Beat Inflation

VOO vs. VTI – Vanguard’s S&P 500 and Total Stock Market ETFs

9 Best International ETFs To Buy (6 From Vanguard) in 2023

Ben Felix Model Portfolio (Rational Reminder, PWL) ETFs & Review

Factor Investing and Factor ETFs – The Ultimate Guide

Gone Fishin’ Portfolio Review (Alexander Green) & ETFs (2023)

TQQQ – Is It A Good Investment for a Long Term Hold Strategy?

Recent Posts

Roth IRA vs. Traditional IRA – Which Is Better for You? (2023)

VXUS vs. IXUS – Vanguard or iShares International ETF?

Tail Risk – What It Is and How To Hedge Against It

I Bonds Explained (US Savings Bonds) – Ultimate Guide (2023)

JEPI ETF Review – JPMorgan Equity Premium Income ETF

Sharpe Ratio vs. Sortino vs. Calmar – Risk Adjusted Return

Investing Risk Explained (My Take on Portfolio Risk & Volatility)

HNDL ETF Review – Is HNDL a Good Investment? (7HANDL™ ETF)

NUSI ETF Review – Is NUSI a Good Investment?

3 Best SPAC ETFs To Invest in SPACs in 2023 – But Should You?

VOO vs. VOOV vs. VOOG – Vanguard S&P 500, Value, or Growth?

VXUS vs. VEU – Which Vanguard Total International ETF?

VT vs. VTI – Global Stock Market vs. Total U.S. Stock Market

RPAR Risk Parity ETF Review – An All Weather Portfolio ETF?

PSLDX – A Review of the PIMCO StocksPLUS® Long Duration Fund

View All...

Footer

  • Facebook
  • Instagram
  • Reddit
  • Twitter
  • YouTube
  • Patreon

Amazon Affiliate Disclosure

OptimizedPortfolio.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

Email Newsletter

Sign up to receive email updates when a new post is published.

Don't worry, I hate spam too. No ads.

About - My Toolbox - Privacy - Terms - Contact


Copyright © 2023 OptimizedPortfolio.com

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Ok, Got ItReject Read More
Privacy & Cookies Policy

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
Non-necessary
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.
SAVE & ACCEPT