The typical investor often makes inappropriate decisions due to a lack of information and a nonsystematic approach. Emotional or behavioral factors can also lead to improper decision-making. By using an Investment Policy Statement, investors have a written document to make prudent and rational decisions.
- Setting Objectives
Set clear and definable expectations, risk tolerance, return objectives and guidelines for investments.
- Defining the Asset Allocation Policy
Create a structure and identify the investment asset classes used to achieve a diversified portfolio and determine how those assets are best allocated toward larger goals.
- Management Procedures
Provide a guide for selecting, monitoring and evaluating the performance of the invested assets and how to appropriately manage changes.
- Communication Procedures
Establish a clear protocol for communicating both processes and objectives among all parties involved, while assigning responsibility for implementation.