How to Create an Investment Policy Statement

Most investors go by an investment playbook — a playbook that writes itself as markets move.

Whether they realise it or not, most investors already have an investment policy. Some rules are explicit. Others only reveal themselves through the decisions being made: adding to a position because it has done well, holding because selling would crystallise a loss, keeping more cash because markets feel expensive, or buying another fund because it appears to offer different exposure. Taken together, these decisions amount to a policy of sorts. The question is whether it was deliberately designed around what the money needs to achieve, or accumulated one decision at a time, usually under pressure.

An Investment Policy Statement (IPS) formalises that thinking in writing. It defines what the portfolio is for, how it should be invested, the risks it should and should not take, and what would justify changing course. These are the core building blocks which are straightforward to name but harder to answer well.

1. What does this portfolio need to do?

“Grow my money” is not enough.

A portfolio exists to fund a purpose: retirement income, a future property purchase, financial independence, capital that may eventually pass to the next generation, often several of these at once. In Singapore, this also means being clear about which pool of capital is doing which job. CPF and SRS monies already carry defined purposes and withdrawal rules; the more open question is what your remaining investable assets need to achieve, and by when.

Start by defining what the money needs to support, when it will be needed, and how much flexibility there is around those plans. An investor drawing from a portfolio in five years faces a different problem from one investing capital they are unlikely to need for another twenty. The return you would like is therefore less useful than the return you need, and the risk you can reasonably take to pursue it.

2. How much risk should you take?

Risk tolerance is often reduced to a questionnaire and a label: conservative, balanced, or aggressive. A useful IPS goes further.

There are at least three “risk” facets to reconcile: how much risk you are willing to take, how much risk you can financially afford to take, and how much risk you need to take to achieve your objectives. You may be perfectly comfortable with large market swings but have an upcoming need for the capital that makes taking that risk imprudent. Or you may have the financial capacity to withstand a substantial fall but know from experience that doing so would make you abandon the strategy. Willingness, capacity, and need rarely point the same way, but the right portfolio balances them without you losing sleep.

3. Decide what the portfolio should own

This is where an IPS becomes more useful than a list of investments.

Suppose one investor owns twenty individual shares, and another owns a single broadly diversified fund holding thousands of companies worldwide. The first has more individual holdings; that alone does not mean the first is better diversified. The same applies in reverse. Owning several funds does not automatically improve diversification if they hold many of the same underlying securities, in which case adding another fund adds another line to a statement without materially changing the portfolio.

This is a common blind spot closer to home, too: an investor who holds a Straits Times Index fund alongside a handful of individual SGX blue chips may look diversified on paper while carrying far more concentrated exposure to Singapore banks and property trusts than they realise, a pattern we’ve written about separately.

Rather than setting a rule such as “never hold more than 20% in one investment,” an IPS should look through each fund’s underlying holdings to define the exposures you want. How much should sit in equities versus fixed income? How broadly should those investments spread across companies, sectors, and markets? Where, if anywhere, are you prepared to accept concentration, and what role does each part of the portfolio serve? The objective is to understand what the portfolio holds as a whole, and why.

4. Decide what would make you change course

The most valuable writing in your IPS while markets are uneventful is noting what should make you change course, and just as importantly, what should not.

Suppose your portfolio falls 20%. One part significantly underperforms another. A market you do not own has an extraordinary year. The financial press is full of reasons why this time is different. Any of these can create a strong urge to act. But which of them is a reason to change your portfolio?

An IPS should define that distinction in advance.

A change in your circumstances may justify changing the portfolio. So might a change to the assumptions or evidence underlying the investment approach. Rebalancing may be required when allocations move outside agreed parameters.

A frightening headline, a period of disappointing performance, or the fact that another investment has recently done better, generally should not.

A good IPS does not predict what markets will do. It decides what you will do when markets test your resolve.

5. Decide how the portfolio will be reviewed

An IPS is meant to create discipline, not rigidity, and your life will change around it. Income changes. Businesses are sold. Children grow up. Retirement gets closer. Priorities that once seemed distant become immediate and sometimes disappear altogether.

The policy needs a review process that checks whether the portfolio serves its original purpose, whether its exposures remain within the intended parameters, whether costs remain reasonable, and whether anything material has changed in your circumstances. The important distinction is between changing the portfolio because your plan has changed, and changing it because markets have.

The document is only part of the discipline

Everything above goes into the document. Writing it down is one thing. Following it, especially when it's hardest to, is another.

You can create an IPS yourself, and working through these questions is worthwhile even if you never produce a formal document. The harder part is answering them objectively. "How much risk can I really afford? Are my six funds providing useful diversification, or six different routes to pretty much the same underlying exposures? Is an underperforming holding in my portfolio doing what it was included to do, or is there a clear reason to replace it? Have my circumstances changed, or is a difficult market simply making the existing strategy harder to live with?"

The policy you write on a calm afternoon is only useful if it is still the one you follow under pressure. Writing it is the easy half. Keeping it is the rest.

We’d welcome a conversation

An Investment Policy Statement is part of how we help clients connect their investment portfolios to the lives those portfolios are there to support. Our process starts with a Discovery, where we first understand your financial position, what the capital needs to do, and the priorities it needs to serve. From there, we build an investment strategy and policy around those objectives, rather than starting with investments and working backwards.

Questions people often ask

Is an Investment Policy Statement only for institutional investors?

No. IPSs are widely used by institutions, but the discipline is just as useful for individual investors. A personal IPS provides a framework for making and reviewing investment decisions when there is no investment committee or formal governance process doing that work for you.

How often should an Investment Policy Statement be reviewed?

Periodically, though a review does not mean the policy needs to change. The more important triggers are material changes in your circumstances, objectives, or financial position. A market fall on its own is not necessarily a reason to rewrite the policy.