To say the stock market has been volatile lately would be a bit of an understatement. Consider that in the month of March alone, every trading day but one saw the S&P 500 price index close 1% higher or lower than the day before. And so far, April has been more of the same. Given this extreme market volatility, even the most seasoned investors or financial advisors may find themselves asking, “What should I do now?”
Experienced RIAs and clients often turn to the most effective investment weapon in an unpredictable market battle: the Investment Policy Statement.
Don’t go to battle without one
An Investment Policy Statement, or IPS, is a written document, mutually agreed upon by you and your financial advisor that dictates how investment decisions are to be made. The IPS is the “blueprint” for your portfolio construction and management and should include all the important factors and unique considerations that impact your investment plan.
Ideally, the IPS should clearly state the objective, time horizon and risk/return expectations for your portfolio. It should establish your strategic asset allocation (as a function of your risk tolerance and goals) and note the various asset classes and asset class percentage targets that will comprise your globally diversified portfolio.
The IPS should determine how often you review your portfolio and how you measure performance. It should also state which accounts or specifically identified assets are subject to exclusion, limitations or restrictions, to eliminate any confusion around the parameters of the managed portfolio. While a complete IPS may include more details than those noted here, it shouldn’t be much longer than two pages.
The weapon of choice in the emotional investing battle
In times of uncertainty, feelings of anxiety, fear and even panic can take over and easily cloud our investment decision-making. Alternatively, in good times, feelings of over confidence and greed can do the same.
We often believe we are making logical decisions based on critical thinking, but really, and unbeknownst to us at the time, our emotions are taking over. It’s not our fault; it’s human nature. And as such, we’re all subject to our own inherent biases and behaviors based on a lifetime of observations and personal experiences.
While emotions and feelings can and should play a vital role in our daily lives, they have no place when it comes to your investment decisions. The IPS serves as a barrier to emotional reactions and enforces discipline around your investment decisions in good times and bad. It helps ensure consistency and clarity around your strategy, eliminates surprises, and keeps your plan in place.
Who is standing shoulder to shoulder with you in battle?
A market like we face today reminds us why every investor should always have a well-developed IPS in place. No commander wants to develop a strategy after the conflict has already started. An agreed-upon IPS created with an experienced, battle-tested advisor can prevent you from making decisions that “feel” right at the time, but ultimately could turn out to be significant mistakes; like selling at a market bottom or buying too much of one stock or one sector, for example.
Creating, following, referencing and evolving IPS documents is an invaluable part of the fiduciary process with our clients at CI Budros Ruhlin Roe. Remember, you can’t control the market and it can be very difficult to control your emotions, but you can control your investment decisions. An IPS is the most effective tool in unpredictable markets. We stand ready to help you put one in place.
Michael Kline, CFP®
Senior Wealth Manager