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How to create an Investment Policy Statement

My last post was all about why you should consider crafting an Investment Policy Statement (IPS).

Here, I’ll show you how to create an IPS, and share my own.

I’m sharing mine in the hopes it might prove a useful starting point for those readers looking to create their own.

I remember I found it surprisingly beneficial when I wrote mine down for the first time. It forced me to consider how I was going to get a grip on both my finances and my investments, and thankfully moved me away from my previous approach, which was basically a headless-chicken approach where I allocated arbitrary amounts to dozens of funds I knew very little about, with no particular asset allocation in mind, but which I’d manage to accumulate over the years and felt too attached to to sell.

 

How to create an IPS

 

There are plenty of ways to skin the IPS cat. I use 7 headings, with an optional eighth for those in drawdown. Each requires only a few lines – it doesn’t have to be War and Peace.

After all, this is just for you, and it doesn’t need to be perfect.

The 7 headings I use are:

  1. Aim (why are you investing?)
  2. Investment philosophy
  3. Asset allocation
  4. Rebalancing method
  5. Fund choices
  6. Taxes
  7. Speculative holdings
  8. Optional: drawdown strategy

 

My Investment Policy Statement

 

Aim

“Retirement isn’t an age, it’s a financial state.”

Investment philosophy

“Compounding is not about earning the highest returns. It’s about earning pretty good returns for the longest period of time possible.”

Buy and hold a simple, globally diversified, cheap, liquid, transparent, and humble portfolio. Invest in line with weight of historical evidence – currently passive. Change only when evidence suggests another approach has a higher chance of long-term success.
-> Maximise the chances the portfolio will still look sensible in 100 years.
-> Minimise regret.
-> Do NOT try and time the market. You have no edge.
-> Don’t let the search for perfect be the enemy of the good.

Asset allocation

“Risk can neither be created nor destroyed.”
You can fail fast (risk to capital), or you can fail slow (risk to purchasing power).

AA is 100% equities. Change only in one of two scenarios:
o Rebalancing.
o My risk profile, time horizon, or circumstances have changed.
-> Re-assess risk profile annually.
-> Do NOT change AA during a crash. (but do adjust speculative holdings if it makes you feel better)

Rebalancing method

“It really doesn’t matter – just pick one.”

(N/A for 100% equities)

Fund choices

“A man cannot serve two masters.”

Stick with Vanguard. Their ownership structure and underlying philosophy gives them the best chance of acting in the best interest of clients. Go for iShares/DB/SSGA if not possible. Change funds only when it’s possible to obtain the same exposure for less, without increasing risks.

Taxes

“The avoidance of taxes is the only intellectual pursuit that carries any reward.”

Balance allocations between pension, GIA, and ISA in line with PFS.

Speculative holdings

“BTFD. WGMI. YOLO.”

All research must come from an anonymous internet stranger, with at least 50% of their investment thesis being written using emojis. Maximum 10% of portfolio.

Drawdown strategy

“Don’t be the richest man in the graveyard.”

(N/A – accumulating)

And that’s it.

It’s steered me pretty well so far, and I’m sure it’ll continue to do so.

As well as my IPS, I also maintain what I suppose what you could call a ‘Personal Finance Statement’, which does a similar job to my IPS, but for my broader personal finances.

Again, it’s only 10 bullet points long, but does a good job of keeping me on the straight and narrow.

 

My Personal Finance Statement

 
  • Aim: become “financially unbreakable”
  • Emergency fund: keep 1 year of expenses in cash
  • Of monthly income:
    • Spend a maximum of 50% on necessities
    • Spend a maximum of 20% on luxuries
    • Invest at least 30%
  • Invest in line with my IPS
  • Don’t turn down free money from my employer (pension contributions, share options)
  • Split investments between my pension, ISA, and repaying the mortgage
  • Pay rises and bonuses: Spend 1/3rd, put 1/3rd in pension, put 1/3rd towards mortgage
  • Pay off credit card in full each month
  • Get the big purchases right, and don’t sweat the small stuff
  • Automate and ignore

Hopefully there’s something you find useful in either the IPS or the PFS. It’s not a necessity to create either of them – just something I found to be helpful. But given they only take 10 minutes to make, I think they’re a no-brainer! 

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Past performance does not guarantee future performance and the value of investments can fall as well as rise. The information on this site is provided for information only and does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investment including any products or services or an invitation, offer or solicitation to engage in any investment activity. Please refer to the full disclaimer on the disclaimer page.

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Norman
May 17, 2022 10:23 pm

Hi thought provoking post. Do you think the 50/20/30 split on necessities/luxuries/investments is a good benchmark for most people of average means? Been finance tracking this year for first time using your spreadsheet to get handle on where we spend our income. Not really thought about the split before but not getting anywhere close to that investing percentage. Not sure if I’m not making the necessary sacrifices or whether this is a benchmark for a higher salary range.

Talcy
May 17, 2022 8:15 pm

“Stick with Vanguard. Their ownership structure and underlying philosophy gives them the best chance of acting in the best interest of clients. Go for iShares/DB/SSGA if not possible.”

I know iShares but who are DB & SSGA please?

Talcy
May 17, 2022 8:52 pm
Reply to  Occam

Thanks for clarifying. Regards

Andrew
May 17, 2022 11:47 am

Hi Occam, another great post. Why do you keep a year’s expenses in cash?

Andrew
May 18, 2022 8:51 am
Reply to  Occam

Hi Occam, thanks, I understand that, and also that everyone’s circumstances vary. But couldn’t you just sell some investments? It’s a liquidity issue, isn’t it? It only takes a few days to return cash from an investment platform, so while we all have emergency cash needs, my question is whether a year is really necessary?

I can see an argument that if your emergency cash need corresponds to a market crash it might hurt to take out some investments (and could conceivably leave you worse off), but I’m not sure even then that keeping a year’s expenses aside on the offchance that it is needed when there’s a huge crash makes sense. Over the long term, having most of that year’s expenses invested would make a big difference to your goals (as of course you know).

If someone’s life savings were equal to one year’s expenses, the policy would imply for them that they invest nothing.

My thinking is just that all of your advice is so practical and sensible that it would be silly to ignore part of it without truly understanding the pros and cons. Perhaps there’s a longer post one day on how to manage the short-term risk of running out of cash!

I think that it’s worth planning 30 day cash, 60 day cash and 180 day cash for the life events you mention – car, washing machine, loss of job, etc. But given I can access my cash within 30 days, I think I need more like a month’s expenses in ready cash.