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:
- Aim (why are you investing?)
- Investment philosophy
- Asset allocation
- Rebalancing method
- Fund choices
- Speculative holdings
- Optional: drawdown strategy
My Investment Policy Statement
“Retirement isn’t an age, it’s a financial state.”
“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.
“Risk can neither be created nor destroyed.”
AA is 100% equities. Change only in one of two scenarios:
“It really doesn’t matter – just pick one.”
(N/A for 100% equities)
“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.
“The avoidance of taxes is the only intellectual pursuit that carries any reward.”
Balance allocations between pension, GIA, and ISA in line with PFS.
“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.
“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!