Recently I posted a sample Investment Policy Statement (IPS) that a DIY investor can use to guide her investment decisions. Subsequently, I received a sample IPS from a financial advisor who is hoping to elicit feedback from you: Is it too complicated? Too detailed? Let us know your thoughts in the comments section. Personally, I thought that the IPS covered all basics I can think of: the asset allocation policy, investment vehicles, rebalancing policy and the benchmark for the portfolio.
Here’s an excerpt from the IPS:
An Asset Class can be defined as a group of securities that tend to behave in a similar fashion relative to each other in general and are constructed and regulated by a common set of rules. Asset Allocation is the actual distribution of money across different asset classes. One of the fundamental assumptions of asset allocation is that the best‐performing asset class changes from year to year and there is no reliable predictive tool for determining which asset class will be the best performer in the upcoming year. Therefore, combining the asset classes together is a prudent strategy as the non‐correlating asset classes will reduce the overall volatility of the portfolio – indeed, lowering the portfolio’s variability of returns for a given level of expected long‐term return is the goal of Asset Allocation. As such, this portfolio will aim to reduce portfolio return variance and increase overall long‐term returns through the selection of multiple asset classes that are expected to be noncorrelating or negatively‐correlating, as well as having long‐term net positive return expectations.
If you invest through an advisor, do you have a written IPS? If you do not have an IPS, ask your advisor why he hasn’t created one for you.
Note: Don’t forget to enter your name in the draw for one copy of The Intelligent Portfolio. Entries will be accepted until 8 P.M. EDT on Friday, July 11, 2008.
