Asset Allocation and Fiduciary Duty
Investment Policy Statement: The Roadmap
Diversification is for those investors who don’t know what they are doing.
The Wizard of Omaha takes the approach that a savvy investor should concentrate his money in only his best ideas, but this is a difficult approach for mere mortals. Instead, it is much more advisable to develop a long-term plan that encompasses the investor’s goals and expectations and tells how best to achieve these goals. The basic building block for any investment portfolio should be the Investment Policy Statement (IPS). Whether you are a small individual investor, a foundation or endowment, or a multi-billion dollar global pension fund, the initial step before investing the first dollar should be the written guidelines of an IPS. The IPS is now part of accepted best practices.
The Investment Policy Statement serves as a roadmap for investors, consultants, and fund managers. There are four basic purposes of an IPS regardless of the size of the investor’s portfolio.
1. Identify the objectives that the investor expects from these funds. Time horizons, liquidity, and risk/return expectations will be quite important as to which investments will be most suitable. The required rate of return should drive much of the design process.
2. Define the asset allocation policy. Asset allocation may arguably be the most important part of the IPS.
3. Create guidelines for selecting investment options.
4. Establishes ...