At Morningstar we are proponents of the investor, and not the investment. We believe that investments are a vehicle to achieve your goals, so it’s important to understand the purpose it serves in your portfolio.

One way that professional investors and fund managers provide structure to this is through an Investment Policy Statement (IPS). 

This statement provides the general investment goals and objectives and describes the strategies to help you get there. It can help you hold yourself accountable, and ensures you are being thoughtful and deliberate with your investing decisions.

An investment policy question connects your goals to the actual investments. In addition to specifying your goals, priorities and investment preferences, a well-conceived IPS ensures that you have a set review process that enables you to stay focused on the long-term objectives. This way, you can ignore short-term noise and avoid irrational decisions.

The following steps are required for your Investment Policy Statement.

Step 1: Document your goals

Documenting your goals might seem straightforward, but there’s more to this than meets the eye. Quantifying and prioritising your goals is paramount. If you do not quantify, you cannot measure success, and if you do not prioritise, you risk lack of focus hindering you from achieving any goals.

Step 2: Outline your investment strategy

The most successful investment strategies are straight-forward and succinct.

For instance, a strategy for those embarking on their investment journey may be as follows: ‘To invest primarily in low-cost passive investments, increasing contributions along with salary increases. Begin with 80% in aggressive assets, and transition to 50% in aggressive assets by retirement’.

An investment strategy for retirees might be: ‘To invest in dividend-paying equities and annuities to deliver a baseline of income; regularly rebalance to provide additional living expenses. Target a 50% defensive/50% aggressive mix.’

Step 3: Document current investments

The next step is document all of your current investments with their recent values. For this, you may wish to use Morningstar Premium’s Portfolio Manager, which allows you to input these electronically and print out an appendix of investments through our affiliate Sharesight.

Step 4: Document target asset allocation

If you have not yet constructed your target asset allocation for your portfolio, you can use Morningstar’s Guide to Portfolio Construction to understand how target asset allocations work, and what suits your circumstances and goals.

Assets move in value—for your target asset allocations, they may be better expressed as ranges instead of a set figure to avoid over-rebalancing and incurring transaction costs. For example, you might have an 80% allocation towards equities, but on any given day that 80% could shift to 75% or 85% of your portfolio. Instead of 80%, express your equities asset allocation as 75%–85%. For major asset classes, stick to a range between 5–10%.

Step 5: Outline investment selection criteria

In your Investment Policy Statement, you must outline your investment selection criteria that will provide guidelines for the types of investments that you want to hold.

For example, if you use Morningstar’s research in your investment decision-making process, you could specify that your equity holdings must have at least 3 stars, or your mutual funds must all be rated Bronze or better.

Step 6: Specify monitoring parameters

Implicit in outlining all of the above policies—from asset allocation to investment-holding specifics—is that you’ll periodically check in on your portfolio to ensure it is still on track to reach your goals.

There may be a few layers to reviewing your portfolio.

It’s also crucial to understand whether your investments are still on track to meet your goals and whether they are diverging from your target asset allocation. You want to avoid over-trading, so you might want to rebalance only when major asset classes are a certain percentage point from the target. If you have set target ranges, this will make the process easier.

Only after these important points in a portfolio check-up, can you compare your portfolio’s performance to a benchmark with similar asset allocations.

Our Portfolio Manager has a toggle feature that can add and remove different benchmarks, including our asset allocation models that range from Conservative to Aggressive.

Our Guide to Selecting Investments can then help you to select investments that suit your mandate.