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Friday, December 10, 2010

The Investment Policy Statement - a Resource

As an investment manager of institutional funds, I came to appreciate the value of an investment policy statement(IPS). The IPS typically specifies investment philosophy, permitted investments, rebalancing parameters, meeting dates, etc. In other words, it keeps everything in the investment process on track. It also provides a readily available history on how the fund was managed and is especially useful for transition purposes. The first thing a professional asks for when taking over a fund is typically the IPS.

DIY investors can profitably use this tool as well and can thereby change an ad-hoc investment approach into one that has some structure. The Bogleheads' Guide to Retirement Planning by Taylor Larimore has two examples starting on page 137 of their book. Both examples are less than a page in length.

Both examples have a "How Much to Invest" section. For "Captain Susan Saver" (I'm not sure how they come up with these names) she states,

I am currently investing $500 a month, which is about 10 percent of my pay. I will maintain the same percentage every year as I get a pay increase and invest half my raise when I receive a longevity increase or get promoted.

Putting the process in writing in this manner in itself creates a discipline to the investment process. Do you use individual stocks? What percent of total assets will be in bonds? What is the percent deviation you will allow asset classes before you rebalance? What is the maximum amount you will invest in individual names? All of these should be addressed in the IPS.

The IPS is also a good place to put down goals, etc. in terms of desired retirement, funding education needs, and so forth. The bottom line is that another person could pick it up and carry out your investment approach.

Developing or reviewing the IPS is a good way for the DIY Investor to start the new year.


  1. Actually I use this writing process in an excel sheet to quickly remind me why I invested in a particular stock and what I am expecting of it. It comes in handy when you need those nerves cooled.

  2. That's the subject of a future post. I am impressed with the bloggers such as yourself who write about their investments. It is the very best tool for becoming a successful investor in my opinion. It is strange how over time we forget what we originally thought and how the mind can play tricks on us. Writing it down creates a record. Great comment!

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