- April 10, 2023
- Posted by: Parker Evans, CFA, CFP
- Categories: Financial Planning, Portfolio Management, Retirement Planning
Essential Guide to Individual Investment Policy Statements
Review of “Elements of an Investment Policy Statement for Individual Investors”
Investment Policy Statements (IPS) have long been considered a key component of managing institutional portfolios. However, individual investors often overlook the importance of establishing a comprehensive IPS to guide their personal investment decisions. Recognizing this gap, the CFA Institute’s “Elements of an Investment Policy Statement for Individual Investors” is a valuable resource for those looking to create a structured and disciplined approach to managing their investments.
The booklet covers several key concepts, each addressing an essential element of an IPS:
The book explains the importance of establishing clear and measurable investment objectives. It offers practical guidance on setting realistic goals, taking into account factors such as time horizon, risk tolerance, and liquidity needs.
This section explores the various constraints that individual investors may face, such as legal and regulatory restrictions, tax considerations, and unique circumstances. The authors provide useful tips for navigating these constraints in order to optimize portfolio performance.
The authors delve into the critical role of asset allocation in determining portfolio risk and return. They outline various approaches to constructing an optimal asset mix, including strategic, tactical, and dynamic allocation strategies.
This section provides a comprehensive overview of the different types of investments available to individual investors, including stocks, bonds, mutual funds, and alternative assets. The authors offer practical advice on evaluating and selecting appropriate investments to meet an investor’s objectives and constraints.
Performance Measurement and Reporting:
The authors emphasize the importance of regular performance measurement and reporting as a means to monitor progress towards investment objectives. They provide guidance on selecting appropriate benchmarks, calculating portfolio performance, and interpreting the results.
Review and Update Process:
Finally, the book stresses the need for a periodic review and update of the IPS to ensure that it remains relevant and effective in light of changing circumstances and evolving investment goals.
“Elements of an Investment Policy Statement for Individual Investors” is written in a clear and concise manner, making it accessible to readers with varying levels of investment knowledge. It is filled with practical examples, case studies, and helpful illustrations to aid in the understanding of key concepts. Furthermore, it offers valuable templates and checklists to assist in the actual creation of a personalized IPS.
The CFA Institute’s “Elements of an Investment Policy Statement for Individual Investors” is an indispensable guide for individual investors seeking to create a comprehensive, well-structured IPS. By following the principles and guidelines outlined in this book, investors will be better equipped to make informed investment decisions and navigate the complexities of the financial markets.
Investment Policy Statement (IPS) Template for Individual Investors
I. Investor Profile
B. Date of Birth:
D. Contact Information:
II. Investment Objectives
A. Primary Objective(s) (e.g., Growth, Income, Retirement funding, Wealth Preservation, Other)
B. Time Horizon (in years):
C. Risk Tolerance (below average, average, above average):
III. Investment Constraints
A. Legal & Regulatory Restrictions:
B. Tax Considerations:
C. Liquidity Needs:
D. Unique Circumstances:
IV. Asset Allocation
A. Target Asset Allocation (percentage of total portfolio):
2. Fixed Income:
3. Cash/Cash Equivalents:
B. Rebalancing Policy (frequency and thresholds for rebalancing):
V. Investment Selection
A. Preferred Investment Types (e.g., ETFs, individual stocks, bonds, other):
B. Investment Criteria (e.g., market capitalization, credit rating, sectors/industries):
C. Restrictions (e.g., prohibited investments, social/ethical guidelines):
VI. Performance Measurement & Reporting
A. Benchmark(s) for Performance Evaluation:
B. Performance Measurement Frequency (e.g., quarterly, semi-annually, annually):
C. Reporting Format (e.g., written report, online dashboard):
VII. Review and Update Process
A. IPS Review Frequency (e.g., annually, biennially):
B. Circumstances Triggering an IPS Update (e.g., major life events, significant change in risk tolerance):
By signing below, I acknowledge and agree to the guidelines outlined in this Investment Policy Statement.
Investor Signature: ________________________ Date: ________________