Chapter 2. The Investment Policy Statement

Have a plan. Follow the plan, and you'll be surprised how successful you can be. Most people don't have a plan. That's why it's easy to beat most folks.

—Paul "Bear" Bryant

No rational traveler would ever take a trip to a place he has never been without a road map and directions. Similarly, no rational businessperson would start a business without spending lots of time and energy thoroughly researching that business and then developing a well-thought-out plan. Investing is no different. It is not possible to make a rational decision about any investment without considering how the addition of that investment would impact the risk and return of the entire portfolio, and thus the odds of achieving the plan's objectives.

There is an old and wise saying that those who fail to plan, plan to fail. Yet, many investors begin their investment journey without a plan, an investment policy statement (IPS) laying out the plan's objectives and the road map to achieving them. The IPS includes a formal asset allocation identifying both the target allocation for each asset class in the portfolio and the rebalancing targets in the form of minimum and maximum tolerance ranges. A written IPS serves as a guidepost and helps provide the discipline needed to adhere to a strategy over time.

Just as a business plan must be reviewed regularly to adapt to changing market conditions, an IPS must be a living document. If any of the plan's underlying assumptions change, ...

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