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Investment Policy Statements

An  investment policy statement expresses the aims and aspirations of the investor in clear, concise, non-technical terms, designed to lay the groundwork for achieving the highest possible return for the least possible risk. 

The investment objective favoured by private investors is to achieve the highest possible return for the least possible risk. And depending on whether equity markets have been rising or falling, investors tend to place more emphasis on the return or the risk side of the coin. To avoid future disappointment, great care must be taken in the design of the Investment Policy Statement.

Clarity of Purpose

An investment policy statement should express the aims and aspirations of the investor in clear, concise, non-technical terms. Phrases such as growth, balanced, conservative and cautious are often used. Likewise time horizons are often described as medium or long term. Use of such jargon should be avoided as the meaning is too imprecise. The intent should be to describe the purpose of the portfolio. It is not a description of how that purpose might be achieved.

Investor objectives

Investors typically have a combination of three aims: preservation of wealth; provision of income; and capital growth. These objectives are not mutually exclusive and the weightings are rarely constant. An understanding of the dynamics of these three variables is essential if a suitable investment policy statement is to be crafted.

Multiple time horizons

An integral part of any investment policy statement is the time period for the stated investment goals to be achieved. Whilst regular monthly or quarterly reporting on performance provides valuable information, loss aversion can cause investors to lose sight of the long term investment strategy. Short term market gyrations should not be allowed to derail long term investment policy. There should be no need to alter an investment policy statement unless the long term investment goals of the investor change.

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