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May 09, 2019

Your Roadmap to Investing Success

In the following article we highlight the importance of a properly structured Investment Policy Statement.

As a Client Portfolio Manager, Russ draws on his years of experience and professional network to help clients align their portfolio to their goals and objectives. He also serves as a sounding board for broader wealth issues.

An Investment Policy Statement (IPS) is a document that is created for you by your client portfolio manager (or advisor). It acts as a GPS for your financial future and provides guidance for objective decision making, helping remove the emotions clouding the investment process. Your IPS provides clarity on how the investment strategy is monitored and measured in relation to your goals and objectives. In essence, the IPS is a roadmap to investing success.

Five key elements of an effective Investment Policy Statement

Five key elements of an effective Investment Policy Statement


1. Summarize your objectives

Gaining clarity on your objectives is the first step towards creating a meaningful IPS. These would include, but not be limited to:

  • Are you looking to generate income to support your lifestyle? Or are you planning to grow your portfolio for the next 10-15 years, and then income will become the priority?
  • Are there certain “liquidity” needs in the future, such as a major purchase (like real estate) or a child’s education?
  • Are you looking to maintain your purchasing power? This means staying ahead of inflation and taxes.
  • Are you investing to leave a legacy to people or causes you care about?

If you have more than one account which makes up your overall portfolio, then gaining clarity on the objective of each account will be important as you develop your IPS. These might include RRSP, TFSA, RESP, Non-Registered, and Corporate accounts, to name a few - and each account may have a different objective.

2. Clarify your time horizons

What is the time frame for each of the accounts in your portfolio? For example, you may view your TFSA as one of the last accounts you plan to access funds from, so it may have the longest investing time horizon of all. For many people certain accounts will have a 25-year plus time horizon!

Other accounts may be shorter-term in nature. If you have a RESP and your children are teenagers, then the time horizon is likely to be only 3-10 years. If you have a US$ account and use that money to live as a snowbird, then the time frame on a portion of that money may be less than one year, or short-term.

3. Be realistic about your tolerance for risk

Risk can carry a variety of definitions depending on the context in which it is viewed. For the purpose of the IPS, you might want to consider risk as the trade-off between the upside and downside potential of the portfolio.

Using a real dollar amount as your reference point may help one better relate to the realities of market volatility which a portfolio may ultimately endure. Let’s say you have an overall investable portfolio of $2,000,000. Use that same number when trying to relate to risk. So when you think about market risk in any one-year time frame, what level of downside would cause you to really question your approach to taking risk? If it dropped by $100,000, $200,000, $400,000, or even $800,000 on paper, at what point might that be too much downside volatility in pursuit of the long-term gains?

The above numbers reflect one-year declines of 5%, 10%, 20% and 40%, respectively, all of which the broader market has experienced at some point in the last 100 years. If you are investing in anything beyond cash and GICs, higher returns are earned by assuming higher levels of risk.

4. Quantify your required rates of return

What do you need each account to do or what does the overall portfolio need to do? It is astonishing how many people will use the “market” as their targeted rate of return, while not fully appreciating the risk that might require (as noted above), when in fact they could very well achieve their goals and objectives with a 5% annualized return. For many investors, a financial plan is a great tool to help them visualize and define the actual performance required from the portfolio to meet their goals and objectives.

5. Establish your asset allocation

Working off the previous four elements, objectives, time horizons, risk, and required returns, you are now in a good position to determine the proper asset allocation for the overall portfolio. So you may determine the proper asset allocation should be 60% equity/40% fixed income. While that may be the proper overall asset allocation, each individual account’s asset mix may vary. As we have discussed earlier, different accounts may have different time horizons, which may warrant different asset mixes. In addition, the tax considerations of various investments and account types should also come into play when establishing your asset allocations.

Finally, your IPS should also state how and when the asset allocation is reviewed and rebalanced.

In summary

As an investor, an IPS could be the most valuable component of your investment strategy. By taking a current and honest assessment of the five key elements outlined above you will be well prepared to create your roadmap to investing success.