Broadly speaking, an investment policy statement (IPS) is a document that defines how an investment portfolio is managed. Investment policy statements have long been used by investors that manage large portfolios. Managers that oversee pension funds. endowments and investment assets owned by life insurance companies adhere to investment policy statements in an effort to increase the likelihood that the investment goals established for the particular account will be met.

But individual investors are increasingly turning to IPSs when setting up their portfolios. Having a plan in place also aids in the decision-making process by reducing the chance that emotionally laden judgment calls will drive investment decisions. Read on to learn how to set up an IPS and how it can help you achieve your investing goals.

Investment Policy Statement for the Average Investor

While investment policy statements have been commonly used by institutional investors and those that oversee large portfolios, they have not been as commonly used by investors who manage smaller accounts (i.e. individuals that have taxable brokerage or retirement accounts). Investors that manage smaller accounts have been inclined to take a wait-and-see approach. That is, many have elected to invest at regular intervals and hope that the accounts will accumulate in value at a rate that will satisfy future requirements.

For instance, take investors who manage their own individual retirement accounts. These investors often do not create investment policy statements. Instead, they deposit regular contributions into their accounts and hope that one day they will have enough money to retire. This turns out to be an effective strategy for some. Unfortunately, others find that they must delay retirement because they have not accumulated enough wealth (To learn more about retirement accounts, please see IRA Contributions: Eligibility & Deadlines and Supplementing Your Retirement Income With IRAs .)

The prospect of delaying retirement has not served to be a strong motivator for most small investors to create an IPS. However, recently, it appears that more have begun to catch on to the idea that having an IPS in place is important. This recent shift in thinking may be due to the wave of investors that will soon leave the workforce and enter into retirement. The worry that people will outlive their assets has motivated an increasing number of small investors to look into creating an IPS to guide the process by which they manage their portfolios.

Essential Sections in an Investment Policy Statement

A simple IPS can be created with as few as six sections. The six sections core to an investor-created IPS are:

Account Information

Account information reveals the actual accounts that will be managed according to the IPS. For instance, an investor may elect to manage a qualified retirement plan, taxable account and a trust based on the same IPS.

Investment Objective