Creating an Investment Policy Statement (IPS)

Almost every major life transition can engender new and often confusing budgetary and cash flow demands. You may be facing a career challenge, a business building scenario, marriage, educations for children, retirement, or a healthcare or caregiving situation. In pondering, “What do I need my money to do?”, an investment policy will emerge.

 A written Investment Policy Statement (IPS) defines the philosophy that guides the management of your money, including a risk/reward profile. The IPS establishes guidelines and constraints to be followed in the management of your financial assets. Normally the IPS does not list specific securities to be used, however, you may note restrictions or securities to be avoided if you have heavy concentrations in a given area or object to certain investments based on social or religious convictions.

The first step is to list current investments. Specify who owns the asset (you, spouse, custodian for a minor, trust, jointly owned, tenants-in-common, business entity, etc.). Ownership information is important in devising income and estate tax planning strategies.

Identify potential inflows and outflows from your portfolio, including Required Minimum Distributions (RMD) from retirement accounts (other than a Roth IRA) for those over age 70 ½, or for Inherited IRAs. What will you withdraw monthly, quarterly, or yearly?

Mortality or longevity assumptions are identified to estimate how long the money might last. What is the portfolio expected to return each year over and above an assumed rate of inflation and estimated tax rate? Will dividends be withdrawn or reinvested?

 How much of a loss can be tolerated over a quarter, year, five years? Will loss minimization techniques be applied, e.g., trailing stop losses? Will option writing (puts, calls, or use of margin) be applied to generate income or hedge volatility?

 What is the current asset allocation? What is the revised target allocation, if any? What is the percentage mix of cash, fixed income (CDs, bonds), large cap stocks, mid-cap stocks, small-cap and/or micro-cap stocks, U.S. stocks, foreign stocks? Will other asset classes such as alternative investments be included?

 Liquidity may be important, especially where there is a high degree of uncertainty. What is the ratio of liquid to non-liquid or semi-liquid investments?

 What is the need for income, now or potentially in the near future? Are issues of aging a consideration? Women facing widowhood often worry about loss of one Social Security check or a decrease in or total loss of pension, Veteran’s, or other income streams at the death of a spouse. Life insurance covering the first to die might alter assumptions, as will long term care coverage.

If the surviving spouse is relatively healthy with a potentially longer life span in an inflationary economy, extra consideration must be given to the investment policy. How long is the money expected to last beyond your passing? 

 State the investment objective: income, growth, or a mixture of both? If a future goal is stated, how long will you be funding a future goal? How much will be contributed each period?

If money is to be withdrawn, what is the withdrawal strategy? Will a “bucket strategy” be employed? What governs withdrawals from a particular “bucket of money”?  Is there a tax strategy?

 Articulate your investment philosophy. What is important to you? What philosophy governs risk, diversification, trading, costs, commissions, and taxes?

 Is there a selection criteria for mutual funds, bonds, stocks, CDs, alternative investments? Are there prohibited or restricted investments? Are categories of investments or industries to be avoided?

 How will the portfolio be monitored and how often? How often will the portfolio be re-balanced? What benchmarks will be applied?  Are expected returns being met? Is volatility within accepted ranges?

 You or the holder of your Power of Attorney (or a trustee if assets are held in a Living Trust) should sign off on the IPS. The executed IPS should be retained should anyone (such as family members) question the policy being followed. The IPS should be reviewed periodically relative to changes in your situation or an environmental change (change in the economic or investment climate, changing tax policy, etc.).

 Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com