How to Write an Investment Policy Statement, 2nd Edition

CHAPTER 7

STEPS TO FORMALIZE THE PROCESS

The following are the specific actions and required steps necessary when assembling an IPS.

STEP 1: Decide on Plan Goals, Objectives, and Strategies

The trustee must give reasonably careful consideration to both the formulation and the implementation of an investment strategy, with investments to be selected and reviewed in a manner reasonably appropriate to that strategy. A trustee’s investment and management decisions must be evaluated as part of an overall investment strategy designed to meet pre-established plan objectives. Specific goals should be established in terms of investment performance with appropriate benchmarks identified to monitor results.

STEP 2: Decide on Strategy for Managing Risk

Modern fiduciary law now recognizes the Nobel Prize-winning work of Harry Markowitz on risk management, which has since become known as Modern Portfolio Theory. This groundbreaking concept is based on a disarmingly simple concept: An investor’s desire is not simply to maximize the return of a portfolio; rather it is to maximize the portfolio return while simultaneously minimizing the portfolio’s risk. Risk management, rather than risk avoidance, has become the standard.

Low levels of risk may be appropriate in some trust settings but inappropriate in others. It is the trustee’s task to invest at a risk that is suitable to the purpose of the trust. Today’s investment strategy is not about the avoidance of risk by trustees but for their prudent ...