Every day millions of investors do something absurd with their money. They invest without an investment policy statement.
In a recent AARP commissioned study by the American Council of Life Insurers, retirees age 60 to 75 were surveyed regarding the factors they were most concerned about that would derail their comfortable retirement. (AARP and American Council of Life Insurers. “What now? How retirees manage money to make it last through retirement. December 2007) The number one concern was inflation, next came a decline in the stock market, third was having to pay for health care and prescription drugs, next was depleting their savings and investment accounts, and last was not being able to work for pay, if needed.
What if we now told you that there is a simple document you can put in place that would address all of these concerns? There is such a document and it is called an Investment Policy Statement or IPS for short.
What is an IPS?
Imagine building a house without a blueprint. You just start building and make decisions as you go. What would the house look like? How would you know when you were done? What would you base your decisions on when you reached critical junctures? How would you hold your builders and contractors to a certain standard of performance?
How about taking a vacation without planning? You just pack up the car with the kids, whatever you have handy, and set out on your journey.
The two examples sound absurd - yet every day millions of investors do something similar with their money. They invest without an investment policy statement.
The investment policy statement is a document that puts your investment strategy in writing and commits it to a disciplined investment plan. It is both a blueprint and a report card for your entire investment portfolio. An added benefit of having an IPS is the confidence of knowing whether you are on track and doing what you can to help meet your financial goals.
Why haven’t I heard of the IPS?
Until recently, only ultra wealthy families, qualified retirement plans like 401(k)’s, certain types of trusts, endowments and foundations had an IPS. In the case of qualified retirement plans, trust assets, endowments and foundations a written IPS is a requirement by law. This document has been used for decades to guide key decision makers on how to manage the vast fortunes they have been entrusted with. Should we be any less diligent with our own money?
Steps to take to establish an IPS
Step one: Assess your financial situation by identifying your goals and needs.
Step two: Determine your tolerance for risk and your time horizon. Any good financial professional will be able to provide you with a risk tolerance questionnaire to accomplish this task.
Step three: Set long term investment objectives. What does your portfolio have to do for you? And what is a realistic range of returns for your proposed asset allocation?
Step four: Identify any restrictions on the portfolio and its assets. Do you want to avoid certain investments, would be an example of one type of restriction.
Step five: Determine the appropriate investment asset classes and mix, also called the asset allocation, to guide you toward achieving your investment objectives at an acceptable level of risk. In order to make sure you are being adequately compensated for the risk you are taking on in your portfolio, it is important to balance risk with potential return.*
Step six: Determine the investment methodology to be used with regards to how you will select your investments, how to make sure you’re meeting your expectations regularly, buy / sell disciplines, portfolio reviews and reporting.
Step seven: Implement the decisions.
So now you have an IPS now what do you do with it?
As part of the process of creating your IPS you have constructed a portfolio and outlined the frequency with which you and your advisors will review it. Each time you or your advisors review your investment portfolio you should review two sets of documents:
1. Statements that show all of your accounts so you can see the big picture.
2. A copy of your IPS.
With this you now have a picture of what your portfolio is doing in light of your goals and return parameters. If there is any discrepancy between what you expect from your portfolio and what you have accumulated, the IPS also should outline what needs to be done. In many cases the best course of action might be no action. A carefully drafted IPS will remind you of this fact.
Avoid potential “great destroyers of wealth”
The bottom line is, a properly drafted IPS can help you to:
Be sure to work with your tax, legal and financial advisors to help address the big issues now with an IPS to help you toward your goals for a comfortable retirement in the future.
*Asset allocation and diversification does not guarantee a profit, nor protect against a loss.
Christopher T. Lawson is a registered representative of Lincoln Financial Advisors Corp.
Securities offered through Lincoln Financial Advisors Corp., a broker-dealer. Investment advisory services offered through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor. Insurance offered through Lincoln Financial and Insurance Services Corp. and other fine companies. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. 31111 Agoura Road Suite 200, Westlake Village, CA 91361. 818-540-6900 CA Insurance License# 0D25153 (CRN200802-2013587)
