A great deal of financial success comes down to executing the basics well. In this series called Investing Basics, we review some of the fundamental tools that can help you and your family build and protect wealth over time. In this installment: Your Investing roadmap

What are your investment objectives? What is your time horizon to meet them? How much risk are you comfortable taking, and how much risk is appropriate to reach your goals? All of these questions and more can be discussed and answered in the process of creating your personal Investment Policy Statement, or IPS for short.

The ins and outs of an IPS were examined in a recent episode of Take Control of Your Wealth, a podcast produced by Christie Matwee MSc, MBA, CFA and Shawnalynn Perron MBA, CIM, FEA, who are both Portfolio Managers at Cumberland Private Wealth Management Inc.

Here are some of the key points which they discussed:

What is an IPS?

An IPS is typically a written document that clearly communicates your financial needs and risk tolerance, and defines the strategic mix of equities and fixed income that will help you achieve your goals. It’s like a road map that helps you and your Portfolio Manager define the goals, preferences and restrictions that should guide your investment strategy.

Who needs an IPS?

An IPS is commonly used within the private client, high net worth, charity and institutional space, but it can be a tool for anyone to lay the foundation for a sound investment strategy and help stay on track over time.

Who writes my IPS?

For an institutional investor, it might be an investment manager, a consultant or even the institution itself. But for individuals, an IPS is often written in close collaboration with their Portfolio Manager.

Why don’t I have an IPS?

If you don’t have an investment policy statement and you’re wondering why nobody’s prepared one for you, it may be a result of the way your portfolio is managed and your particular relationship with your manager. An IPS is typically  prepared when your Portfolio Manager is making investment decisions for you on a discretionary basis.

At Cumberland, we are discretionary portfolio managers. That means we are held to the highest standards and have a fiduciary duty to act in our clients’ best interest. An IPS is essential to help us understand, articulate and agree upon what those interests are for each client.

What should my IPS include?

Broadly speaking, the key components of an IPS are your Investor Profile, Investment Objectives, and Investment Constraints. In other words: who are you, what are you trying to achieve, and what are the appropriate risks or restrictions that need to be considered when it comes to managing your portfolio?

When we define your Investor Profile and Investment Objectives, we want to understand everything about your current situation and future goals. 

For example, we’ll document your age, marital status, dependents, employment situation, assets, debt, income, whether you earned the money from employment or inherited it, or maybe from selling a business or real estate.

We’ll also delve into whether you are looking to fund retirement, create a family legacy to pass on to future generations, preserve capital to pay off a mortgage, or generate income to live on, or perhaps you have everything you need and just want to preserve your purchasing power and keep up with inflation.

From this understanding, we can take into consideration not only the need for return to achieve your goals, but also the risk involved in doing so, keeping in mind that aiming for higher return typically comes with higher risk. 

So, if there are conflicting objectives – such as maximizing returns and minimizing risk at the same time – we need to decide which is most important and find an appropriate balance between the two aims.

We’ll also take into account any specific constraints you may have, which always includes the time horizon to achieve your goals, and usually includes other issues such as liquidity needs, tax considerations, legal or regulatory requirements and any other unique circumstances.

To summarize, your Investment Policy Statement is like the foundation and frame of your house. It provides the structure and shapes the portfolio for exactly your needs and risk tolerance. You can’t just start with the asset mix – it’s important to think through what you’re really trying to accomplish to ensure that the portfolio ultimately achieves its goals. 

Your IPS can also be referred to when you’re tempted to adjust your asset mix based on short-term considerations such as market volatility. A good Portfolio Manager will help you refer back to your IPS and remember why you’re invested the way that you are, which can make it much easier to stay on track over time and feel comfortable.