What is the purpose of an investment policy statement (IPS)?

An investment policy statement (IPS) serves a critical role in the investment management process by documenting an investor's goals, risk tolerance, and investment strategy. The IPS acts as a foundational document that captures the investor's individual objectives, whether they are focused on growth, income, or capital preservation. It also outlines the level of risk that the investor is willing to accept, establishing a framework for investment decisions that aligns with their personal circumstances and financial goals.

By clearly defining these key elements, the IPS ensures that both the investor and the investment manager have a mutual understanding of the guidelines to follow for managing the portfolio. This clarity helps to keep the investment strategy consistent over time, especially during market fluctuations, and provides a benchmark for evaluating performance against the stated goals.

While minimizing tax liabilities, analyzing market trends and forecasts, and evaluating asset class performance are important facets of investment management, they do not encapsulate the primary purpose of an IPS, which is centered around the investor's personal objectives and risk preferences.