What an investment policy statement records.

What it is

An investment policy statement, or IPS, is a written document that sets out the goals for a portfolio and the rules for managing it. Pension plans, endowments and foundations have used them for a long time. Many individual investors have one too.

It is not a promise about results. It is a record, in plain words, of what you and your adviser agreed before the money was invested: what the money is for, how much risk it can take, and how decisions about it will be made.

What it usually records

No two look the same, but most cover the same ground.

Goals

What the money is for, and when you expect to need it. That second part is your time horizon.

Your situation

Income, taxes, other savings and anything else that shapes what this portfolio has to do.

Risk

How far the value could fall before you would want to change course, and how much risk your goals require.

Cash needs

Money you will need to draw, and when, so it is not tied up when the time comes.

Limits

Anything you will not own, for your values or your beliefs, and any legal or tax limits.

Allocation

The mix of asset classes, such as stocks, bonds and cash, and the range each one may move within.

Process

Who may place trades, how often the portfolio is reviewed and what happens when it drifts from its mix.

Why write it down

Three reasons come up again and again.

• It puts the hard conversations first, before any money moves, while everyone is calm.
• It gives you a fixed point when markets swing. The question becomes "does this still fit what we wrote?" rather than "what should we do now?"
• It makes the adviser accountable. You can compare what was done with what was agreed.

Discretion and restrictions

An adviser with discretionary authority may trade in your account without asking you first. Without it, the adviser needs your approval for each trade. Your agreement records which one you chose, and the IPS often repeats it.

You can usually also tell an adviser what not to buy: a company, an industry or a type of security.

How it guides a portfolio

The allocation sets the target mix. When markets move, the mix drifts. If one part moves outside its range, the portfolio is brought back toward the target. That is rebalancing, and the IPS says when it happens.

Within each part of the mix, investments are chosen to fit the goals and limits the IPS sets. The statement is then the test for every later choice: does this fit what we wrote?

An IPS does not remove risk. Investing in securities involves a risk of loss, and a written policy is a way to take that risk on purpose.

When it should change

An IPS should change when your life changes, not every time the market does. Retirement, a new job or the loss of one, a move, a marriage or a divorce, a child, an inheritance or a change in health can all change your goals, your time horizon or how much risk you can carry.

Acrylic's brochure says accounts for its ongoing advisory services are reviewed on an ongoing basis and at least quarterly, and more often when market conditions or client circumstances warrant, and that Acrylic engages with each client annually to review the portfolio. Reviews may also be triggered by changes such as retirement, termination of employment, a physical move or an inheritance (Form ADV Part 2A, Items 13A and 13B).

Questions to ask about yours

1. Can I read it, and question it, before any money is invested?
2. Does it say plainly whether you may trade without asking me?
3. What would lead you to recommend changing it?
4. How will you show me that the portfolio still matches it?