Why this is so important

Blog post #474

One of the most important services that we provide for clients is preparing a written Investment Policy Statement (IPS) for them.

Developing a written Investment Policy Statement, along with a diversified portfolio, are critical for making the investment process more disciplined and systematic, and less emotional. For most long-term investors to meet their various financial goals and objectives, they need to be able to stay in the financial markets.

Having a written Investment Policy Statement can increase the likelihood that you will adhere to your plan (during both good and bad markets) and give you a better chance of attaining your financial goals.

An IPS document means you have a target for your asset allocation plan. You don’t just have a bunch of investments that are randomly thrown together. You have a written investment plan based on your current situation, your goals, needs, time perspective and tolerance for risk. This provides both you and us, as your advisor, with discipline to act rationally in a world full of unknowns and uncertainty. 

The IPS that we develop for each client states their overall asset allocation target, such as 70% stock / 30% fixed income, or 40% stock / 60% fixed income. It states what % of the stock allocation would be invested in the US and Internationally. It then identifies target allocations for various asset classes, such as US Large stocks, US Large value, US small and small value stocks, as well as for International asset classes and Real Estate.

For clients of our firm, having an IPS may seem logical as we have always used them.  However, some other brokers or financial advisors may not develop IPS documents or asset allocation plans for their clients.  If you don’t have a plan or target, how can you properly monitor the risk of your portfolio?

An IPS may sound like an impersonal document. But behind this Policy Statement is our understanding of your personal, family situation and your goals. We talk with you to learn and understand your objectives and concerns, before we prepare your IPS. Everyone is different and unique. Two people of the same age and assets may likely have different IPS’, as they are unique with different past experiences and different future goals. While the IPS is an unemotional document, preparing an IPS for each client is a very personal process.

Having an IPS allows us to manage portfolios in a rational manner. This means that we are not reacting to current events with guesses and predictions. We act and provide guidance in a disciplined manner. For example, during the onset of the Covid crisis last winter and spring, IPS’ provided us and our clients with the structure to buy stocks when markets fell, as we worked to maintain their stock allocations in the desired range. This enables us to help our clients maintain their stock exposures during times of great uncertainty and volatility, when your emotions may be telling you it’s time to get out of stocks.

Having an IPS with target asset allocations prevents your stock allocation from getting either too high or too low. When markets or specific asset classes go down, we would review buying more. This was mid-2020. When stocks increase, such as they have done very strongly in past months, we review client portfolios to see if their stock allocations have grown to exceed their target stock exposure. This is what we are doing now and have been doing over the past few months. This provides the discipline of buying low and selling high.

Your IPS would also clearly state that there will be times when your diversified portfolio will vary from major stock market indexes, such as the S&P 500. A diversified portfolio is very different than an index which is comprised of just US Large stocks. This means there will be periods, which could be months or years, when a diversified portfolio will underperform or outperform a major market index. We talk about this likelihood for portfolios to be different than major US indices with our clients in advance, to manage their expectations.

Your IPS can be revised. This is generally done because of changes in your financial situation over your lifetime, not usually due to changes in current financial markets. The goal is that the IPS is a long-term document that is not influenced by short-term ups and downs of the stock market. It is impacted (and modified) by changes in your life, your finances and your goals.

Isn’t the goal of investing to help you reach your financial goals? Then working with a financial advisor that uses a written Investment Policy Statement should be an important part of your financial planning.

 

Note: As a reminder, the blog will be emailed to you every other Friday going forward.

 

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

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