How to Build an Investment Policy Statement
Live Markets Editorial Team
Updated:
Create an investment policy statement that records goals, constraints, allocation, rebalancing, liquidity, and decision rules for a durable portfolio.
Write down why the portfolio exists
An investment policy statement records the purpose and constraints that should guide portfolio decisions. Start with the goal, relevant time horizon, expected withdrawals, liquidity needs, and any legal or operational limits. A policy becomes more useful when it distinguishes required cash from assets that can tolerate market fluctuation.
Describe risk in terms the decision-maker can revisit: what loss or volatility would threaten the plan, and what would make that estimate change? A statement cannot remove uncertainty, but it can reveal when a proposed investment conflicts with a known obligation or limit.
Turn the objective into observable rules
Record the intended asset mix or ranges, acceptable instruments, concentration constraints, and the process for rebalancing. Define how holdings will be classified so a fund is not counted differently from one review to the next. Avoid rules that depend on vague phrases such as “when markets look risky.”
Specify what information will be reviewed and how exceptions are approved. For an organization, identify who has authority to recommend, approve, and execute a change. For a household, decide where records live and how a major change in circumstances will trigger review.
- Add an approval date and the people responsible for review.
- State allocation boundaries and how drift will be measured.
- Record the reason and date for any exception.
Set a review schedule without chasing markets
A periodic review can confirm that objectives, cash needs, and account details remain current. A major life, liability, or governance change may justify an earlier check. A short-term market move alone need not rewrite a long-horizon rule unless it exposes an assumption the policy can no longer support.
Keep prior versions or a change log so a reviewer can see what changed and why. If the statement grows into a long collection of product opinions, simplify it around durable decisions and move operational records to a separate file.
Keep the statement distinct from a forecast
A policy describes how decisions should be made; it does not promise a return or make every implementation choice correct. Revisit the document when its assumptions change, and preserve the rationale for keeping it when short-term results are uncomfortable.
This guide is educational information, not individualized investment, tax, accounting, or legal advice. CFA Institute's individual and institutional IPS frameworks are professional guidance, not universal legal requirements; applicable governance duties vary by investor and jurisdiction.
Sources / References
- Elements of an Investment Policy Statement for Individual Investors — CFA Institute — CFA Institute's 2010 position paper covers individual objectives, risk requirements, constraints, and governance; it is professional guidance, not a universal legal template.
- Elements of an Investment Policy Statement for Institutional Investors — CFA Institute — CFA Institute's 2010 position paper covers institutional objectives, risk requirements, roles, and governance; applicable duties still depend on the entity and governing law.