An investor policy statement is a simple document that will help you define your financial goals and achieve them. I share mine, and resources to help you craft your own.
I enjoy internet forums. I’ve been a lurker (non-participating reader) of several forums for quite a while. Since beginning to write, I’ve become a more active participant. I learn a lot when a question is raised and then answered by dozens of interested people with different backgrounds and perspectives. Crowdsourcing for a solution to any dilemma can be a great way to help you make a decision or simply become more educated on a topic of interest.
A frequent question that comes up on the forums I frequent looks something like this:
“Which is better, Small Cap Index Fund or Small Cap Value Fund?”
“I’m starting a Roth IRA. Should I use a Target Date Fund, a Total Stock Market Fund, or a Three-Fund Portfolio?”
“My 401(k) has expensive investment choices. Which of the following lousy funds should I have in my 401(k)?”
“I received a bonus/windfall of $10,000/$100,000/$1 million. How should I invest it?”
All of these questions, and hundreds of other similar questions that are posted on the internet every day, can be solved with the same exact answer:
“You need an investor policy statement.”
To answer any of these investment questions in isolation is problematic. The specific answer to the question proposed depends on a wide variety of factors that are rarely disclosed. I’d like to help, but I cannot responsibly tell you which fund(s) I think you should hold in a particular account without knowing what holdings you’ve got elsewhere, what your desired risk tolerance and asset allocation might be, how long your time horizon is, or what your goals are. If you don’t know these things yourself, we need to establish them first. This is where the Investor Policy Statement (IPS) comes into play.
What is an IPS?
An IPS is a list of your investing goals and strategies, incorporating your risk tolerance, desired asset allocation, and specific plans to achieve them.
Where can you get an IPS?
Here’s mine. If you want it, you can have it, although you will certainly need to change it to adapt it your own situation. A much better solution would be to create your own from scratch based on your life circumstances, goals, and risk tolerance.
The Physician On FIRE Investor Policy Statement
Retirement Asset Allocation:
Why do I say you need an IPS?
That’s a fair question, and I’ll admit that need is a rather forceful word, but there are many benefits to creating an IPS. You can get by without one, but you really ought to have one. Here’s why:
How do I get started?
Start with the basics. Determine your risk tolerance, and come up with a reasonable, preferably simple, asset allocation. Take some time to consider your goals. Talk with your significant other if you’ve got one. When you’ve got some goals figured out, write them down. Take time to understand the investment options available via the workplace and externally, and how to best utilize them to reach your goals. Your IPS can be much simpler than mine and could fit on an index card. The specifics can wait. You can make it as detailed as you like, of course, and I’ve seen some much longer than mine, too.
Where can I find additional resources?
The Bogleheads Wiki has examples and links to threads with many more examples.
The White Coat Investor has written a How To Guide on writing an IPS.
Google is a great starting point for the answer to just about anything, ever. This link is set up to search Google for you, so you don’t have to.
Take some time and come up with a simple investor policy statement. It doesn't have to detailed or complicated. It can even fit on an index card. A few guiding statements is much better than nothing at all.