An investment policy statement (IPS) is a written document that sets out your financial goals, your tolerance for risk, and the rules you will follow when you buy, sell, and rebalance. You write it before the market tests you, so you have a plan to follow when emotions run high. This guide covers what belongs in one, shows a worked example you can adapt, and explains how to write and review your own.
TL;DR
- An IPS is a one-to-two page rulebook for your portfolio: goals, risk limits, asset allocation, selection criteria, rebalancing rules, and who does what.
- The CFA Institute lists return and risk objectives, time horizon, liquidity needs, and constraints as the core of an individual IPS.
- Write it in plain numbers ("rebalance when a position drifts 5 points from target"), not in vague intentions.
- An IPS is not an account statement. Your broker sends the second one. You write the first.
- Review it on a schedule, and change it when your life changes, not when headlines do.
Table of Contents
- What an investment policy statement is
- What an investment policy statement should include
- An investment policy statement example
- How to write your own, step by step
- When to review and update your IPS
- An IPS is not an account statement
- Perspective: why rules matter more than forecasts
- Putting an IPS into practice with StockPilot
- FAQ
- Sources
What an investment policy statement is
An IPS is a formal, strategic document that outlines your goals, your investment strategy, and your risk tolerance. According to the CFA Institute's guidance for individual investors, it guides how an investment program is planned and managed, and it helps you stay focused on long-term objectives instead of reacting to volatility.
Think of it as a business plan for your portfolio. Investopedia describes it the same way: it ties your long-term goals to specific, actionable management steps.
The idea started in institutional investing. Pension committees, endowments, and foundations use an IPS so that trustees, managers, and staff all work from one set of rules. Individuals get the same benefit in a smaller package. If you manage your own money, you are the trustee, the manager, and the person who might panic at the worst moment. A written policy lets the calm version of you give instructions to the stressed version.
Why a written policy beats good intentions
Most investors have a plan in their heads. It usually sounds like "buy quality, hold for the long term, don't overreact." Then a stock falls 25% in a week, and the plan turns out to have no numbers in it.
A written IPS does three jobs:
- It forces decisions in advance. How much can you lose before you act? What does acting mean? Answering those questions on a quiet Sunday is cheaper than answering them mid-selloff.
- It creates accountability. The CFA Institute notes that an IPS establishes accountability for any person or firm acting on an investor's behalf. For a self-directed investor, the person you hold accountable is yourself.
- It documents your reasoning. Investopedia notes that serious investors record not only why they change course but also why they stay the course despite temporary swings. That second record is what keeps you from tinkering.
What an investment policy statement should include
The CFA Institute framework breaks an individual IPS into a handful of parts. Here they are, with what each should say in practice.
| Section | What it answers | What a useful entry looks like |
|---|---|---|
| Purpose and goals | Why are you investing? | "Grow the portfolio and begin drawing income at age 62." |
| Return objective | What do you need the portfolio to earn? | A target in numbers, tied to a benchmark |
| Risk tolerance | How much loss can you stomach and afford? | A maximum drawdown you can live with, in percent and dollars |
| Time horizon | When will you need the money? | Years until first withdrawal, years of withdrawals |
| Liquidity needs | What cash do you need on short notice? | Months of expenses held outside the portfolio |
| Asset allocation | How is money split across asset classes? | Targets and allowed ranges |
| Security selection | How do you choose holdings? | Written criteria, position-size caps |
| Monitoring and rebalancing | How often do you check, and what triggers a trade? | A calendar and drift thresholds |
| Constraints | What limits your choices? | Taxes, account types, legal or personal restrictions |
| Governance | Who decides, who executes, who reviews? | Names and a review schedule |
Goals, return, and risk
Start with what the money is for. Retirement income, a house purchase in eight years, and a legacy for your kids are different goals with different timelines, and they may need separate sections or separate accounts.
The return objective should be realistic and measurable. The risk section should separate two ideas. Willingness to take risk is emotional: how you feel about a 30% drop. Ability to take risk is financial: whether you could still pay your bills and meet your goals after one. Write down the lower of the two. If you could survive a 35% drawdown financially but would sell at 20%, your policy should be built around 20%.
Time horizon and liquidity
These two set the boundaries. Money you need within a few years does not belong in the same bucket as money you will not touch for twenty. The CFA Institute lists liquidity needs as a core element, and for retirees this is where income planning lives: how much you will withdraw, from which accounts, and what cushion sits in cash or short-term Treasuries.
Asset allocation and security selection
Asset allocation is usually the biggest driver of how your portfolio behaves, so the IPS should state targets and acceptable ranges, for example 70% stocks, 25% bonds, 5% cash, with stocks allowed to range between 65% and 75%.
Security selection answers a different question: what qualifies a holding for the portfolio? Index funds need little written criteria beyond cost and tracking. Individual stocks need more: minimum market capitalization, the maximum weight of any one position, how many positions you hold, and what causes a sale.
Monitoring and rebalancing
Investopedia points out that the IPS should define how often you check the portfolio and what benchmarks you measure against. Choosing the right yardstick matters more than most investors expect, and our guide on how to choose a benchmark for your portfolio walks through it.
For rebalancing, pick a rule you can follow without debate. Some investors rebalance on a calendar. Others use tolerance bands, which only trigger a trade when an allocation drifts far enough. Our explainer on the 5/25 rebalancing rule covers one band-based approach that avoids overtrading.
Governance: who does what
The CFA Institute says the governance section should specify who sets policy, who executes trades, who monitors results, and how the document gets reviewed or updated. If you work alone, it can be two lines. If you share decisions with a spouse, an advisor, or a trustee, it should be explicit. A good risk management checklist can help you turn the "what happens if I am wrong" part of governance into concrete steps.
An investment policy statement example
Sample statements, such as the one Investopedia publishes, typically open with an executive summary: the investor's age, total assets, return goal, and risk profile such as conservative. They then cover return and risk goals, portfolio selection and rebalancing guidelines, and performance monitoring.
Below is a short, fictional example for a self-directed investor. Every figure is an illustration to adapt, not a recommendation.
Investment Policy Statement: Jordan and Sam Rivera
Summary. Married couple, both 54. Taxable and retirement accounts total $850,000. Goal: retire at 62 with portfolio income covering part of living costs.
Return objective. Beat a 60/40 stock-bond benchmark over rolling five-year periods, net of costs.
Risk. Maximum tolerable drawdown 20%. A drop beyond that triggers a scheduled review, not an automatic sale.
Liquidity. Twelve months of expenses in cash and Treasury bills outside the portfolio.
Allocation. Stocks 65% (range 60% to 70%), bonds 30%, cash 5%.
Selection. No single stock above 8% of the portfolio. Funds must have expense ratios under 0.25%.
Rebalancing. Check quarterly. Trade only when an asset class is more than 5 percentage points from target.
Governance. Jordan executes trades, Sam reviews quarterly results, both sign off on any change to this document.
Notice what makes it work. Every line is a number or a rule, and none of it depends on predicting the market.
How to write your own, step by step
- List your goals and dates. Write each goal with an amount and a year.
- Measure your risk capacity. Check how much you could lose without changing your plans. Then check how much you could lose without losing sleep. Use the smaller number.
- Set your time horizon and cash reserve. Decide what stays outside the portfolio.
- Choose an allocation range. Pick a target and a tolerance band for each asset class.
- Write selection and sizing rules. Include a maximum position size and the conditions that qualify or disqualify a holding.
- Define monitoring and rebalancing. Pick a benchmark, a check-in schedule, and a trigger.
- Assign roles. Say who decides and who executes.
- Set a review date and sign it. Signing sounds formal, but it makes the document feel like a commitment.
Keep it to one or two pages. A policy you can read in five minutes is a policy you will actually reread.
When to review and update your IPS
The IPS is meant to be a living document, and the CFA Institute's governance guidance includes a procedure for reviewing it. A sensible rhythm is a scheduled review once a year, plus a review after a life event: a job change, retirement, marriage, divorce, an inheritance, a new child, or a shift in your tax situation.
What should not trigger a rewrite is market noise. A falling market is exactly the situation your IPS was written for. If the plan says what to do at a 20% drawdown, you follow it. If you find yourself editing the rules during a selloff, that is a signal to slow down, not a reason to change the document.
When you do update it, note the date and the reason. Over time that log becomes a record of your own decision-making, and it shows whether your changes came from new facts or new fear.
An IPS is not an account statement
People often confuse the two. An account statement comes from your broker and reports what you own and what happened. FINRA Rule 2231 generally requires member firms to send customers quarterly statements describing securities positions, money balances, and account activity, subject to exceptions.
Your IPS is the reverse: it comes from you and says what you intend to own and why. Use the broker's statement to check whether your real portfolio matches the policy.
Perspective: why rules matter more than forecasts
We built StockPilot around a simple observation: most self-directed investors do not fail because they lack information. They fail because they have no written rules, so every headline becomes a decision.
An IPS fixes that on paper. Our model portfolio fixes it in practice. It holds 19 positions, six income-producing and 13 AI-selected growth positions, and it changes only when predefined investment and risk criteria call for a change. When market conditions turn unfavorable, the system is designed to reduce growth exposure and move capital toward Treasury ETFs. That is a rebalancing and risk rule, stated in advance, not a prediction.
We think this is what a good policy looks like for a busy professional or a retiree: clear position sizing, clear replacement decisions, clear alerts after the market closes, and no pressure to trade on noise. You keep your own brokerage account and place every trade yourself. We do not take custody.
If you write an IPS and then hand the day-to-day execution to a transparent, rules-based process, you get discipline without the daily screen time.
David Elliot
Putting an IPS into practice with StockPilot
If you want your IPS to cover growth and income without researching stocks every week, you can write your policy around a model portfolio and let it supply the security selection and sizing rules. StockPilot Premium costs $147 per month. Subscribers mirror a 19-position model portfolio in their own brokerage accounts and receive after-hours buy and sell alerts only when the system's criteria call for a change.
In IPS terms, the model covers selection criteria, position sizing, replacement decisions, and a defined risk response. You still write the parts only you can: goals, time horizon, liquidity, tax constraints, and the cash you keep outside the portfolio. See how it works for the details, and read the risk disclosure before you subscribe, since all investing involves risk, including loss of principal.
If you want to dig deeper before deciding, these guides pair well with an IPS:
- Portfolio risk management for DIY investors
- Performance tracking metrics and dashboard KPIs
- Portfolio analytics metrics that reveal manager skill
FAQ
What should an IPS include?
At minimum: your return and risk objectives, time horizon, liquidity needs, asset allocation targets and ranges, security selection criteria, monitoring and rebalancing rules, and any constraints such as taxes. If others help manage your money, add a governance section naming who does what.
Do individual investors really need an investment policy statement?
No law requires one, but it is useful for anyone who wants to avoid reactive decisions. The CFA Institute describes it as a guide that keeps you focused on long-term objectives. It may matter more when you manage money yourself, because nobody else is there to slow you down.
How long should an investment policy statement be?
One to two pages is enough for most individuals. Longer documents belong to institutions with committees and multiple managers. Clear numbers and short rules matter more than length.
What is the difference between an investment policy statement and an investment statement?
An IPS is your own plan: goals, risk limits, and rules. An account statement is a record your broker sends showing positions, balances, and activity. One guides decisions, the other reports results.
How often should I update my IPS?
Review it at least once a year and after major life events. Change it when your goals, finances, or time horizon change, not because the market moved.
Sources
- Elements of an Investment Policy Statement for Individual Investors, CFA Institute
- Understanding an Investment Policy Statement (IPS), Investopedia
- An Example of an Investment Policy Statement, Investopedia
- FINRA Rule 2231, Customer Account Statements