What is an Investment Policy Statement?

An investment policy statement is a document setting out the investment strategy for a person or company. People working with investment managers use such statements as part of their contracts to make expectations and goals clear, while individuals and companies managing their own investments use these documents to create a framework for investments. The statement covers the purpose of the investments, the goals, and the guidelines for investing, in addition to setting out performance standards to provide a rubric for measuring the performance of the investments.

There are a number of software programs designed to help people generate investment policy statements, along with worksheets available in investing guides and manuals. People can also start from scratch if they prefer to draft documents from the ground up, or they can work with a finance advisor or investment manager to develop an appropriate investment policy statement. Some documents are very long and may take hours to draft.

In the investment policy statement, the objective of the investments should be clearly established, like saving money for retirement or developing a college fund. The goals, often pegged to a benchmark, are also discussed, as people want to generate reliable returns. An investment philosophy discussing issues like diversification, investments to specifically avoid for ethical or other reasons, and so forth is also included. Investment policy statements can also talk about what the investor wants to leave for heirs after death.

The statement can also discuss changes in investment philosophy over time. A 25-year-old person developing an investment policy can afford to take more risks because youth makes it possible to recoup losses. As the person ages, the investment approach needs to change, as losses can be more damaging. People near retirement tend to pick risk-averse investment strategies to ensure that money will be available when they are ready to stop working. Creating a long-term plan sets out clear goals and helps people stay on track.

Developing an investment policy statement allows people to focus while investing and also prevents common traps like taking risks in response to market shifts. By setting out clear goals, people create a path to stick to, and resist temptations presented along the way. People without investment strategies tend to take more risks and may expose themselves to losses by investing inconsistently. Keeping to a plan established at the start of an investment with an investment policy statement will help people achieve their goals.