The Importance of an IPS for Your Investment Accounts

IPS stands for Investment Policy Statement. The ‘I’ could also stand for Important, because it is!  An investment policy statement gives you a solid framework to make good investment decisions.

In the investment world your success is and should be compared to something, so it can be measured.  The measurement of investment success is usually based on two factors.  The first is what your return or loss is, based on your risk tolerance.  The second is what your return is compared to the index most closely related to your portfolio make-up.

If you have a high risk tolerance and your return is 12%, this in and of itself this does not mean anything.   If you have a high risk tolerance and you have your account primarily invested in large cap equities, and the S&P returned 17% during the same period you received 12% – you did not do so well.

This is true on the down side as well. For example, if the S&P is down 12% and your account is down 17%. You should always know or ask when looking at an account’s return…what is this compared to?

Okay, so where does the IPS come in? Before I get into the details of why and

specifically what an IPS is, I want to share a quick story. Well-known motivational speaker Tony Robbins teaches a strategy called ‘modeling’.  This is where you find someone who is successfully doing what you want to do and model them.  If you want to be thin, model what a thin person does.  If you want to be a great salesperson, model what a leading salesperson does.  This also applies to being a good investor.  Model what leading investors do, and it is likely you will be a more successful investor than if you do it on your own.  In a nutshell it can be described as ‘copying behavior’.

The reason I tell this story is, if you are going to model successful investors, one group to consider modeling is pension accounts, foundations, and large trust accounts.  These types of accounts manage billions of dollars. The one common dominator almost all these accounts will have is they will have an Investment Policy Statement for each of their accounts.

The IPS will outline how an account is invested, how often and under what circumstances the Investment Strategies Orlando will be adjusted, who makes the adjustments, and how investments are chosen.  As an example, how much do you have in large cap, small cap, international, etc…? This is the somewhat secret reason why institutional investors typically outperform retail investors.   If you and your advisors set it up correctly, an Investment Policy Statement will provide the following:

xxxx Discipline - When making decisions about meeting the goals of investments, an Investment Policy Statement, (along with the advisor for the investor), need to be extremely systematic and disciplined in order to meet the goals.

Clarity - In order to avoid misunderstandings, the expectations and objectives for all parties involved need to have precise clarity.

Logic – Decisions need not be and cannot be made in a reaction to emotions. Instead they need to be made in a deliberate, logical way.

Process – In order to enable all parties involved to know what to expect, there must be approved procedures in place that all parties understand.

Accountability – The Investment Policy Statement must contain clear objectives and ways that these objectives and recorded decisions are being made, indicating they comply with the investor’s requirements.

Communication – The future beneficiaries need to have a clear understanding of what their duties are going to be down the road. This needs to be demonstrated through clear communication between all parties involved.

 

In summary, this is a one page document that summarizes how you are going to invest assets in a particular account.  Each Account should have its own IPS because many times you will have different goals, objectives, and risk tolerances from account to account.   This is easy and straight forward, do not over think it or make it too complicated.

Resource By : http://corewealthconsultants.com/the-importance-of-an-ips-for-your-investment-accounts