4 Crucial Steps to Creating a Winning IPS in the New Year

An IPS, or Investment Policy Statement, is a formal document that outlines the investment objectives, guidelines and procedures that will be followed to manage an investment portfolio. Discover the 4 crucial steps to creating an effective IPS and boosting your investments in 2024.

An IPS describes your investment objectives, sets the guidelines for your investment activity, and ultimately determines how to build your portfolio. Your time horizon, liquidity needs, employment status, and other wealth determine your ability to take risks, which should override your willingness to take risks. The return objective specifies the long-term average real return you want to earn, taking into account what is achievable given your risk tolerance.

When markets are as volatile as they have been in 2023, it’s easy to get caught up in day-to-day price action and lose focus. Therefore, the new year is an excellent time to go back to square one for a total investment review and build your portfolio from scratch. One of the first steps to doing this is to create an Investment Policy Statement (IPS) that outlines your financial objectives, establishes a roadmap for your investment activity, and ultimately determines the outline of your portfolio. You can easily do this by looking at the four main elements of an IPS and asking yourself these questions.

1) Time Horizon: what is the timeline for my goals?

The first step to creating an IPS is defining your investment objectives and how long you have to achieve them. If you are 40 years old and are investing to fund your retirement at 65, for example, you have a long time horizon – 25 years. On the other hand, if you are a young professional and want to buy a house next year with the money you are investing now, you have a very short time horizon – just one year. To find yours, ask yourself what your investment goals are and what your timeline looks like.

Your time horizon has a huge impact on your ability to take risk and, in turn, the composition of your portfolio. The longer your horizon, the more risk you can take because you have more time to weather short-term market volatility, recover from investment losses, and replenish your account with future savings. The shorter your time horizon, the less risk you can take. Imagine you were retiring next year: a large investment loss could have a huge negative impact on your ability to finance your retirement.

2) Liquidity Needs: how often will I need to withdraw money?

A liquidity need is a demand for money beyond what you are saving in your investment account. If you regularly need to withdraw money from your investment account to support yourself, then you have high liquidity needs. If this is the case, you should invest mainly in liquid assets – that is, those that can be easily and quickly converted into cash. High liquidity needs also reduce your ability to take risks: if you depend on constant cash withdrawals, a large investment loss could be disastrous.

If you have low liquidity needs, however, you can take more risk and invest in illiquid assets such as corporate bonds, real estate, and even collectibles like art and classic cars. These assets can boost a portfolio’s return. And since many of them don’t typically follow traditional asset classes, they can increase a portfolio’s diversification and reduce its overall risk. If you have a long time horizon, you likely have lower liquidity needs and can dedicate a larger portion of your portfolio to illiquid assets.

3) Risk Tolerance: how much loss can I bear?

This can be thought of in terms of your willingness and ability to take risks. Of the two, the latter should generally prevail. In other words, if you have a high willingness to take risks but a low ability to do so, you should definitely avoid it as it can lead to disastrous financial results. However, if you have a high ability to take risks but little willingness to do so, you may miss out on potential gains by investing too conservatively. If you’re still undecided about which side you’re on, it may be best to invest conservatively. You may miss out on some gains, sure, but you’ll avoid regularly making bad investment decisions in response to market volatility—a worse outcome.

To determine your risk-taking ability, ask yourself the following question: How much loss can I sustain before it seriously compromises my financial situation and investment objectives? If a small loss leads to a disastrous financial outcome (for example, preventing you from adequately funding your retirement next year), then you have a low risk-taking capacity. If, on the other hand, you can lose all of your invested money without harming your current financial situation or preventing you from achieving your investment goals (because you have a long time horizon, a good paying job, or wealth elsewhere), then you have a very high capacity to take risks.

One way to quantify your risk tolerance is to specify the largest acceptable reduction you can handle. The largest drawdown is the largest peak drop in a portfolio’s value. Anything between 0%-20% means you have a relatively low risk tolerance, between 20%-40% is considered medium, and above 40% is high.

4) Return Objective: How much money do I expect to earn?

There’s a reason why specifying this is the last step in creating an IPS: Your time horizon and liquidity needs help determine your risk tolerance, which, in turn, determines your return objective. So, if you are investing conservatively (because you have a low risk tolerance), then you shouldn’t set an unrealistically high return goal.

This return objective should be stated as an actual long-term average – not a goal you hope to achieve each year. Markets are unpredictable, and such a goal is unrealistic. The return target should also ideally be stated as a real return – i.e. return after inflation.

US stocks have generated about 8% average annual real returns since 1928, and US government bonds about 2%. This helps give you an idea of ​​the kind of real returns you should expect: somewhere between 2-8% is realistic, depending on your risk tolerance.


By answering these questions and considering the four key elements of an IPS, you’ll be well on your way to building a portfolio that meets your needs, goals, and risk tolerance. Remember that periodically reviewing your IPS and adjusting your portfolio as needed is critical as your circumstances and goals may change over time.


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