Investment Policy Statement

A formal written document created to govern investment decision making after taking into account the client’s objectives and constraints. This statement is formulated in the planning stage of the process as mentioned above.

Role: Investment policy statement has the following roles to play:

  • Endorse long-term discipline in all the portfolio decisions.
  • Easily implemented by both current as well as future investment advisors.
  • Protect against short-term portfolio reallocation in case the changing markets or the performance of the portfolio causes overconfidence or panic.

Investment Policy Elements

Elements: An investment policy statement has several of these elements:

• A complete client description providing enough background so that any investment advisor can understand the client’s situation.
• A purpose with respect to investment objectives, policies, goals, portfolio limitations and restrictions.
• Identification of responsibilities and duties of all the parties involved.
• A formal statement depicting objectives and constraints.
• A schedule for reviewing the performance of the portfolio and the policy statement.
• Ranges of asset allocation and guidelines regarding rigidity and flexibility when devising or modifying the asset allocation.
• Instructions for adjustments in the portfolio and rebalancing.

Conclusion

The portfolio management process is a set of comprehensive steps that needs to be followed with complete dedication and understanding to achieve the stated objectives. Investment policy statement is a crucial component of this process and is a key aspect in creating a portfolio or evaluating the performance of any portfolio. Both the client and the investment advisor need to share the same expectations and outlook of the portfolio.