How to Create a Personal Investment Policy Statement

The Document That Separates Professionals from Amateurs

Every institutional investor — pension funds, endowments, sovereign wealth funds — operates under a formal Investment Policy Statement (IPS). It defines what they will invest in, how much risk they will take, and under what conditions they will act. It is not optional. It is required.

Yet virtually no retail investor has one. They invest based on tips, feelings, headlines, and vague intentions. Then they wonder why their results are inconsistent.

A personal IPS is a written contract with yourself. It defines your investment philosophy, constraints, and rules before emotions get involved. When the market drops 20% and every instinct screams sell everything, your IPS tells you exactly what to do instead.

What an IPS Contains

A complete personal IPS covers seven areas:

Section 1: Investment Objectives. What are you investing for? Retirement in 25 years? A house down payment in 5 years? Be specific: "Grow portfolio to $500,000 by 2045 for retirement" is useful. "Make money" is not.

Section 2: Risk Tolerance. Both emotional and financial. How much drawdown can you endure without panic-selling? Most investors overestimate their tolerance in bull markets and discover the real number during the first 20% drawdown.

Section 3: Asset Allocation. Define your target allocation (e.g. 70% equities, 20% bonds, 10% alternatives) and rebalancing triggers — either time-based or threshold-based.

Section 4: Investment Selection Criteria. What types of investments will you use? Index funds only? Individual stocks with specific quality filters?

Section 5: Position Sizing Rules. Maximum allocation to any single position, sector, or geography. These constraints prevent concentration risk.

Section 6: Exit Rules. Under what conditions will you sell? Thesis invalidation? Stop-loss trigger? Target reached? Define these before you enter any position.

Section 7: Review Schedule. Annual review minimum. Quarterly portfolio alignment check recommended. The IPS should only change when your life circumstances change — not when the market changes.

Walking Through the Template

Start with a single page: "I am investing for [goal] with a [X]-year time horizon. I can tolerate a maximum drawdown of [Y]% without selling. My target allocation is [breakdown]. I will rebalance [when/how]. I will only invest in [criteria]. No single position will exceed [Z]% of my portfolio. I will sell when [conditions]. I will review this policy every [frequency]."

That single paragraph, written honestly and followed faithfully, will outperform most sophisticated trading strategies.

Risk Tolerance Assessment

Practical test: Imagine your portfolio drops 30% over three months. Really visualize opening your brokerage app and seeing $70,000 where $100,000 used to be. What do you do? If you would sell some to protect the rest, your real tolerance is lower than 30%. Be honest — your IPS is only useful if it reflects your actual behavior under stress.

The Review Cadence

Monthly: Quick portfolio check. Quarterly: Alignment review against IPS targets. Annually: Full IPS review — update only if life has changed, not because the market has.

Using KeepRule's Refine feature to formalize your personal rules creates a living version of your IPS — one that evolves as you learn from experience and can be checked against your actual behavior in real-time.

Common IPS Mistakes

Mistake one: making it too complicated. A one-page IPS you check weekly beats a twenty-page IPS you never reference.

Mistake two: changing it during market stress. The whole point is to pre-commit to decisions when you are rational. Changing rules during a crisis defeats the purpose.

Your Next Steps

Block 30 minutes this weekend. Write your one-page IPS. Put it somewhere you will see it. The act of writing it creates commitment. The act of following it creates results.

This content is for educational purposes and does not constitute personalized investment advice.