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Planning For Your Investments
Part 2 of 3-Part Series

The second part of that statement is referring to your ability to take on risk. It is in essence a snapshot of your financial position at the time of evaluation, measured through your assets and liabilities. With plenty of assets and low liabilities, it makes for a good candidate to be risk tolerant because portfolio losses can be absorbed and survived if needed. Conversely, if there are low assets or even high assets with relatively high liabilities, then the ability to take on risk is not there, and risk aversion is necessary.

 

Together the willingness and ability for risk form the final result of whether your investment portfolio will be risk averse or risk tolerant. The willingness has much to do your your individual psychological makeup, while the ability is based on the hard numbers. They are quite opposite and that has a lot to do with why your risk profile report is so effective for evaluation. The report is typically evaluated from a series of detailed questions with your financial advisor.

 

Investment Policy Statement

Quite simply put, an Investment Policy Statement is a set of rules that you as the investor would like your financial manager to follow for your portfolio. It outlines how they are to manage your investment to achieve your goals, along with stating those goals, and how risk should be managed. Even though it is not the strategy to be used for your portfolio, it forms the purpose and governance on which the strategy must adhere to. The strategy for your investment portfolio should always operate within the scope of the IPS, regardless of how often it changes through its timeline.

 

Of course, the IPS can be altered as financial standing and risk tolerance of the investor (you) changes, but this would be done at a time where there is little stress on you and your portfolio. It would also have guidelines for IPS changes along with what reasons are not acceptable for IPS change. This is because another purpose of the IPS is to govern yourself. When there are swings in our investment portfolios, most usually in times of loss, we are driven by emotions rather than clear thinking and the choices we make are not always the best. The IPS serves as a reminder that these are the goals and guidelines which you agreed and which are ultimately the best path for your portfolio.

Part 3 continued next week.