Why should I have an investment policy statement?

I heard someone at my office say how large pension funds use investment policy statements. He said small investors can use them to manage their investments as well. How can I use an investment policy statement? Can I use it outside of my 410(k)?

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August 2016

Yes you can use an Investment Policy Statement outside of your 401(k).

An IPS can be very helpful for both large and small investors.

The IPS is a document detailing the circumstances, objectives, constraints and policies which should be followed between the advisor and investor. A well-constructed IPS presents the investor’s financial objectives, the degree of risk she is willing to take and any relevant investment constraints such as liquidity, time horizon, taxes, legal or any of the investor’s unique circumstances which the advisor should consider. It also establishes Portfolio monitoring and review terms and procedures for the investor’s portfolio.  

The process of drafting a well-constructed policy statement will give the investor an educational process which will allow her to better recognize appropriate investment strategies so she no longer needs to blindly trust investment advisors. The IPS should be easily understood by other advisors if a second opinion is needed or a new advisor needs to be hired. This will ensure your investment continuity. Also this document can protect both the investor and advisor should a question arise in the future. If it does then both can refer to the document for clarity.

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