Planning for investing success – a look at the Investment Policy Statement

Example investment plan showing missing details in planning for investing success
In order to get somewhere or achieve something, it’s good to have a plan. And if you have a plan, it’s even better to write it down so that you can follow it or even consider how you might change it. It’s no different for investing. Here are some thoughts on planning for investing success.

Planning for investing success

Investing money is, by its financial nature, easily influenced by thoughts and behaviors that you might not even be aware of. Yet you need discipline to “stay the course.” Think about how easy it is to stray from the path the next time you read a blog post which says something like, “the stock doesn’t meet all my criteria, but I decided to buy shares in Visa because …”

Changing between radically different investing strategies is an expensive way to invest and may not get you to your outcome. As long as your investment strategy is reasonable (I would avoid the Skirt Length Theory for example), write your strategy down and stick to it.

Enter the investment policy statement…

The Investment Policy Statement (IPS)

If you approached a professional finance advisor for help with investing, he or she would likely draw up and present you with an Investment Policy Statement. This describes what the advisor will, and will not, do. It also describes the investment strategy to be followed.

This is a great concept to use and apply to your own investments. You don’t even need an advisor for it. Writing out your IPS makes you describe and think about what you’re signing up for. It’s something you can rely on and use to stay on course if you’re tempted to do something rash.

Investment Policy Statement is a bit of a mouthful, not to mention a little pretentious, so feel free to call it something else. “Investment Plan”, “FIRE Escape Plan” or even “Ian” are all good names.

Plus, it’s yours. So you can put as much detail or make it as simple as you prefer. It’s not about filling out some template and checking the boxes. It’s more about writing down something that helps you in your investing and provides guidance on future decisions.

I’ve rolled my IPS into my Charter as I include more than just investing for Financial Independence in it. This is just something that works for me, but then I write technical specifications all day.

What your IPS should describe

Here are the main areas that you should try to write out and explain.

1. Objectives

What are you trying to achieve, why are you trying to achieve it and for when? This section provides overall objectives, goals and timeline to be met.

If your objective is retirement then also include the timelines of when you can access social security and retirement accounts.

2. Account info

Describe the bank, brokerage and retirement accounts that you will be using for your investments. Include any that you plan to use but haven’t opened yet.

3. Investing Strategy

Describe your investing strategy. Some points to consider are.

a) What assets will you include and why?

Investment portfolios are typically a mixture of stocks and bonds, sometimes with additional asset classes such as real-estate or gold / commodities. Within each class are more detailed sub-classes (US vs International stocks, Growth vs Value).

Once you know what asset classes you’ll be investing in, write them down and explain why you’ve picked them.

b) How and when will you make purchases?

This can vary from an automated contribution to your 401k, to a more complex set of rules for buying / selling individual stocks.

c) How will you access the money?

If your goals require withdrawing money from the investments over time, give some thought on how you’ll withdraw the money.

4. Asset Allocation

Your target asset allocation should be described; what percentages of each asset or stock sector do you plan to hold?

Over time your portfolio asset allocation will drift from your target allocation. Explain how you will rebalance back to the target allocation and under what conditions.

5. Monitoring & Control

Describe how often you’ll be checking up on your accounts. I don’t believe it’s worth monitoring your personal performance against other benchmarks; the only performance goals you have to meet are your own objectives so focus on those.

Include some details on how’ll you change the IPS and under what conditions. Although the goal is to “stay the course”, there are some times that you need to adjust. But changes shouldn’t be because of some emotion or feeling.

Next steps

I’ve made an example template below as a starting point.

Example IPS Template

However, it’s impossible to make a ‘one fits all’ template because of the variety of investing goals. You need to own your IPS and make it personal! I even threw in an exclamation point for more emphasis.

I’ve also listed some online resources below you can use as additional input into your plan.

Examples from around the web

The Common sense IPS at awealthofcommonsense.com is a great starting point for new investors.

The Bogleheads have an Example IPS on their wiki page. It includes links to some real-world examples too.

Morningstar’s guide includes a template file.

A comprehensive IPS can be found at investingforme.com, although this is very formal.

Summary

Channel your inner Cylon and make a plan when it comes to investing since it’s a long-term project. You can have different plans for different goals too.

I believe that writing things down is very powerful. Committing something to paper, or even to a blog, makes a statement of intent. Although it definitely helps if you remember to read what you wrote!

An IPS is simply one tool to help with planning for investing success. Since it’s your plan, make it whatever you need it to be.

10 thoughts on “Planning for investing success – a look at the Investment Policy Statement”

  1. I went over and checked out your charter and IPS. Your charter is amazingly detailed – something I’d expect to read at work! Nice one.

    I also like your thoughts on how to value your house, i.e. 94% of the Zestimate. I’ve had “appreciation” according to Zillow, of 60k in the past year in my house. Pretty ridiculous.

    1. Hi Erik,
      Yeah I go a little overboard with anything involving numbers!
      The Zillow estimate on our house went ballistic a couple of months back too. No idea why. It’s best to be conservative about your house pricing, since its real value is what you can sell it for (and after agent fees). Zillow may help set an anchor price though – I’m sure anyone shopping for a house take a look there to get some ideas.
      Thanks for stopping by, hope you’re enjoying MLK day.
      Best wishes,
      -DL

    1. Hi DIB,
      I’m glad you found it useful! I think it’s important to write down your plans and objectives. Investing requires discipline more than emotion and anything that helps you stay on course is a good thing.
      Best wishes,
      -DL

  2. I think have a written down plan is important as it helps you stick through bad times and not get too crazy during the good times. Overall, as long as you’re in it for the long term that’s the key to investing success.

    1. Hi Timeinthemarket,
      Complete agree – it can help you ignore the noise and reinforce why you should continue on your path for the long-term. And if the objective happens to be investing for a shorter timeframe, it can help with selecting, and sticking with, a suitable mix of assets with fixed-income or cash equivalents.
      Thanks for commenting and stopping by!
      Best wishes,
      -DL

  3. Last year, I bought a car and took an $8k loan out at 5%. 3 months later I paid it off. For me, it was a matter of freeing up cash flow and the “addictive-ness” of being debt free. I have a mortgage, but I also have roommates (I don’t have to worry too much about that debt for now.)

    1. Sounds perfectly reasonable to me! Everyone has their own attitude on debt and it’s interesting how some kind of debt is acceptable and some less so. Best wishes,
      -DL

    1. Hi Ambertree,
      Yes, it can help to keep you on track. It’s definitely worth making time to write one up and maintain it going forward.
      Best wishes,
      -DL

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