# Understanding an Investment Policy Statement (IPS) and Its Benefits

![Investment Policy Statement (IPS): A document drafted between a portfolio manager and a client that outlines general rules for the manager.](https://www.investopedia.com/thmb/ynMBf-hlDrhmEAZe9g3IZWboeEw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ips.asp-final-aed341467fc847599850cd67eb13bf1b.png)

*— Investopedia / Mira Norian*

## What Is an Investment Policy Statement (IPS)?

An Investment Policy Statement (IPS) is a crucial document in portfolio management, outlining investment goals, asset allocation, and strategies. Typically used by [portfolio managers](https://www.investopedia.com/terms/p/portfoliomanager.asp) and financial advisors, it specifies rules and frameworks to guide decisions and align them with the client's financial objectives.

It's standard practice for portfolio managers to have an IPS in place for their institutional clients such as retirement [plan sponsors](https://www.investopedia.com/terms/p/plansponsor.asp) and mutual funds. Many financial advisors also draft an IPS for their individual clients.

### Key Takeaways

*   An Investment Policy Statement (IPS) serves as a formal document that outlines the general investment rules, goals, and strategies for a portfolio manager or financial advisor and their client.  
    
*   The IPS includes essential components like asset allocation, risk tolerance, and liquidity requirements to guide investment decisions and objectives.  
    
*   A well-designed IPS helps maintain focus on long-term investment goals and provides a framework to avoid reactionary decisions during short-term market fluctuations.  
    
*   Regular review and monitoring of the IPS ensure alignment with the client's changing financial circumstances and reinforce the commitment to established investment principles.  
    
*   An IPS acts as both a business plan for the portfolio and a safeguard against hasty portfolio changes due to market volatility.  
    

## Deep Dive Into Investment Policy Statements

[Investment advisors](https://www.investopedia.com/terms/i/investmentadvisor.asp) and [financial advisors](https://www.investopedia.com/terms/f/financial-advisor.asp) often use IPSs to document an investment plan with a client. It provides guidance for informed decision-making and serves as both a roadmap to successful investing and a bulwark against potential mistakes or misdeeds.

An IPS lists the investor's objectives and time horizon. For example, it may state that by age 60, an individual wants the option to retire with a portfolio that yearly returns $65,000 in today's dollars, considering inflation.

 A well-conceived IPS also outlines [asset allocation targets](https://www.investopedia.com/articles/investing/060515/example-investment-policy-statement.asp). It specifies how to allocate between stocks and bonds and breaks down sub-asset classes like global securities by region. Targets have minimum and maximum deviations to trigger rebalancing.

> **Fast Fact**
>
> An IPS should give special attention to describing the investor's risk/return profile. That includes naming asset classes that should be avoided and those that are preferred.  

## Crucial Elements for a Comprehensive IPS

Besides listing the investor's goals and preferences, a [well-made IPS](https://www.investopedia.com/articles/financial-advisors/101315/how-create-client-investment-policy-statement.asp) sets up a review process. This helps the investor focus on long-term objectives, even when the market is volatile.

It should contain all current account information, current allocation, how much has been accumulated, and how much is currently being invested in various accounts.

The IPS should include monitoring and control procedures to be followed by everyone involved in the investment process. This includes establishing the frequency of monitoring, specifying benchmarks for comparison of portfolio returns, and concrete procedures for making any future changes to the IPS.

Serious investors think through the possible reasons for changing their IPS, such as financial or lifestyle changes. More importantly, they specify the reasons not to change their IPS (i.e., short-term market performance).

A comprehensive IPS with clear steps can help advisors deter clients from drastically changing their portfolios during market downturns.

## Real-World Example of an IPS in Action

[Napa Valley Wealth Management](https://www.napavalleywealthmanagement.com/), an investment advisory firm located in Walnut Creek and Saint Helena, CA, prepares investment policy statements for individual clients that might run about a dozen pages. "Your IPS helps ensure we’re both on the same page, and it serves as a roadmap for ongoing investment decisions about your portfolio," the document's introduction reads.

A Napa Valley IPS then summarizes the client's investment policy in a table:

## What Are the Components of an Investment Policy Statement?

Different investment policy statements will have different components, but generally, they seek to address the scope of the investment, the governance, the investment's rate of return and time frame, risk, risk management, and taxes.

## What Is the Purpose of an Investment Policy Statement?

The purpose of an investment policy statement is to detail how an investment portfolio will be built, managed, and assessed. Its goal is to align both the investor and the investment manager regarding all aspects of the investment process.

## Do You Need an Investment Policy Statement?

If you are working with an investment management firm, it is most likely that an investment policy statement will be provided to you. If you work for or own an investment management firm, it is good practice to offer your clients an investment policy statement. This helps to ensure that all parties in the investment process are on the same page and understand the goals and risks involved.

## Key Takeaways for Crafting an Effective IPS

An investment policy statement (IPS) serves as a comprehensive business plan for your portfolio, aligning the investor's goals with the portfolio manager's strategies. By detailing the investor's risk tolerance, asset allocation, and liquidity needs, an IPS guides informed decision-making and helps maintain focus on long-term objectives. Investors should use an IPS to manage their investments effectively and avoid reactive changes based on short-term market fluctuations.

> **Article Sources**
>
> 1.  Napa Valley Wealth Management. "[Investment Policy Statement Sample](http://static.fmgsuite.com/media/documents/c7eea045-9138-49f5-94dd-9db4be7d870b.pdf)," Page 2 of PDF.
>     
> 2.  Napa Valley Wealth Management. "[Investment Policy Statement Sample](http://static.fmgsuite.com/media/documents/c7eea045-9138-49f5-94dd-9db4be7d870b.pdf)," Page 3 of PDF.