How to use an Investment Policy Statement (IPS) to focus on your financial goals

investment-policy-statement-ipsAs another weekend has rolled along, I have, like many people have been tempted to hit the shops and fritter some hard earned cash on frivolous things. Fortunately, I have managed to apply some restraint and am spending my time doing more productive activities which may earn some income in future.

It is important to be consistent and disciplined when you are aiming to achieve financial independence. The road is long and full of many potential pitfalls. One thing for sure is that there are no short cuts as with most financial objectives. Depending on your situation, it is reasonable to assume that financial independence can be achieved in a period of between ten and twenty years. This seems long but time flies and I think the wait is worth it if it means that you will have managed to obtain the choice and freedom to do what you want with your time.

The difficult thing about this process is how do you stay focused on the goal and ensure that you achieve your aspirations. In the corporate world employees have programmes like yearly appraisals by their manager where long and short term SMART (Smart, Measurable, Achievable, Relevant, Time-bound) goals are set.

Here I will show you how you can record your personal investment goals and minimise the probability of being sidetracked along the way. Whether you want to be rich, financially secure or get out of debt, this guide should be useful.

Investment Policy Statement (IPS)

This is where the Investment Policy Statement (IPS) comes in. An IPS is a statement produced by an individual, investor or professional money manager and their client, which outlines their long term objectives in relation to a portfolio or financial situation.

The IPS does not have to be a long or complicated document and has to be referred to regularly to check if the stated objectives are still being followed. Ideally you want the IPS to be carefully thought out at the beginning and comprehensive, so that the goal posts are not shifted when things get tough.

What goes into a good IPS

A well conceived IPS contains a number useful sections. These are not set in stone and can be tweaked where it makes sense:

  1. Investment philosophy – This is all about motivation. It outlines in your own words the approach to investing that you will be taking for example index fund investing or a more dividend focused approach. I also have inspirational quotes by top investors in my IPS here.
  2. Goals – State your specific, time bound and realistic objectives here. For example “I want to clear £10,000 of loan debt by March 2018” or “to raise my savings rate to 33% by April 2020”.
  3. Asset Allocation – Define your asset allocation strategy. For example “to maintain a proportion of bonds equal to my age”. This would mean that a 40 year old would strive to hold a 60% stocks/ 40% bonds asset split in their portfolio.
  4. Funds and accounts – This sets out the specifics of the account types to use and the sorts of investments to use. This depends on what is available in your country. In the UK this can stipulate that only ultra low cost funds should be invested in an tax free ISA provided by a low cost provider such as Vanguard or Fidelity.
  5. Target fund allocation – Specific targets of allocation percentages for individual funds. These should feed into the overall asset allocation mentioned above. For example 25% for a USA fund or 30% for a government bond fund.
  6. Contributions and rebalancing – Define how often you intend to contribute and how much. Also state the rebalancing strategy and frequency.

Case Study and Video

To show how this can be applied we will consider the case of Charles, a 30 year old engineer who has the desire to be financially independent by the age of 43. Due to lack of financial education, Charles has made a mess of his finances but now realises that he needs to turn this around. Fortunately he has managed to clear his debts and is now at a net worth of zero.

To achieve his goal, Charles has to start saving a good proportion of his income (40%+) and regularly invest it in an aggressive low cost portfolio containing 70% stocks, while rebalancing the assets on a yearly basis. He is also encouraged to read up on the top investing books to educate himself about the subject. All this can be incorporated into his IPS. My video below shows how such an IPS could look like:

IPS Template

Click below to access the IPS document showing the case study. You can modify this and use as your own IPS.

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