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Why You Need an Investment Policy Statement

April 01, 2022

Since January, you’ve learned about the seven areas of financial planning and four steps for saving money. This month, you are invited learn why I believe you need an investment policy statement.

Do you know what rate of return you should expect of your investments? Do you know how much money you need to achieve your specific financial goals? For the purposes of this article, investments are negotiable securities (ex. stocks, Exchange Traded Funds) which are bought and sold on an exchange (i.e. New York Stock Exchange), also known as the stock market.  

An Investment Policy Statement (IPS) provides guidance on choosing your investments and a framework for evaluating the performance of the person who manages your investments.

An IPS is a critical part of the Investment Planning process because it defines your why/how/what/when/where/who of your investment portfolio. Having an IPS is helpful, especially during times of stock market volatility. Components of an IPS may include:

  • Why you invest. What is your required rate of return (ROR) to help you meet your financial goal? What is your risk capacity as it relates to your ROR?
  • What kind of investments you buy. Investments to include and/or exclude.
  • How you invest. What is your risk tolerance?
  • When you need the money. How much time do you have to reach your financial goal?
  • When you pay taxes. What will happen when you withdraw money from your account(s)? (Retirement accounts are taxed differently than brokerage accounts.)
  • Where you look to benchmark your portfolio’s performance. Define benchmarks and how much of the portfolio may be aligned with those benchmarks.
  • Who helps you interpret the performance of your investments. A CERTIFIED FINANCIAL PLANNER™ cannot control market performance but she can define reasonable expectations for how your portfolio is likely to perform during a variety of market conditions and determine whether you are on track for meeting your financial goals.

Risk tolerance translates to how much volatility can you handle in your portfolio when the market goes down. When your risk tolerance is out of alignment, you may sleep very little during periods of market volatility.

Risk capacity translates to how much risk you need to take based on your goals and is tied to your required ROR. No one likes losing money, but a diversified portfolio is likely to include a mixture of investments that will act against and within alignment of the market (i.e. while some investments go down, others go up and vice versa).

A CERTIFIED FINANCIAL PLANNER™ may help you to create your IPS, determine your required rate of return, calculate the amount of money you must set aside to reach your financial goals, and work with you to choose investments that make up a diversified portfolio.

Wendolyn Forbes is a CERTIFIED FINANCIAL PLANNER™.  For more information about Wendolyn’s financial services practice, please visit her website at

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss. As with any investment strategy, there is the possibility of profitability as well as loss.

Originally published in the April 2022 issue of Positively Haywood by Vicinitus.