What Is an Investment Policy Statement?
An Investment Policy Statement (IPS) is a written document that defines your investment objectives, constraints, and the rules governing how your portfolio will be managed. It serves as a contract between you and your advisor (or yourself, if self-directed) — establishing clear guidelines that prevent emotional decision-making during market stress.
Think of it as your portfolio's constitution: it defines the principles and rules that govern all investment decisions, regardless of market conditions or emotional state. When markets crash 30% and every instinct screams "sell everything," your IPS provides the rational framework you established during calm times.
Key Components of an IPS
| Section | Contents | Example |
|---|---|---|
| Investment objectives | Return target, time horizon, purpose | "Generate 6% real return over 20 years for retirement" |
| Risk parameters | Maximum drawdown tolerance, volatility budget | "Maximum acceptable decline: 30% in any 12-month period" |
| Asset allocation | Target weights and allowable ranges | "Equity: 75% (range 65-85%), Fixed income: 25% (range 15-35%)" |
| Rebalancing rules | When and how to rebalance | "Rebalance when any asset class drifts 5%+ from target" |
| Investment selection criteria | What types of investments are permitted | "Index ETFs with MER below 0.50%, no individual stocks" |
| Constraints | Liquidity needs, tax considerations, ESG | "Maintain 2 years' spending in cash/GICs at all times" |
| Review schedule | When to review and potentially update the IPS | "Annual review in January, or upon major life change" |
Why Every Investor Needs an IPS
Without a written IPS, investment decisions are made ad hoc — influenced by recent market performance, media headlines, and emotional state. Research shows that investors without a documented plan underperform those with one by 1-2% annually, primarily due to poorly timed buying and selling driven by fear and greed.
The IPS is particularly valuable for high-net-worth professionals who may be tempted to "do something" during market volatility. A physician who excels at decisive action in their practice may apply that same bias-to-action in investing — where doing nothing is usually the optimal strategy during market stress.
When to Update Your IPS
Your IPS should be reviewed annually and updated when material life changes occur: marriage/divorce, children, inheritance, career change, approaching retirement, or significant change in financial situation. It should NOT be updated in response to market movements — that defeats its purpose as a stabilizing document. Coordinate your IPS with your broader wealth management plan.