What is an investment policy statement?

An investment policy statement outlines the rules you want to follow for your portfolio. These rules can help you avoid making decisions based on your emotions — in good or bad times.

An investment policy statement can be a useful tool for working with a financial advisor (or switching to a new advisor). It contains information that will help your advisor manage your portfolio. It provides a guide when they’re making investment decisions with you or on your behalf.

An investment policy statement starts with your needs and objectives as an investor. Many of these things your advisor will likely discuss with you at your first meeting. Knowing your investing goals and your risk tolerance will help inform your advisor’s advice. This information provides a clear sense of what you want to accomplish with your investments. It also gives you guidelines to avoid making investing decisions based on short-term emotions, like following the crowd.

If you are a DIY investor, an investment policy statement can also be very useful. It can help you clarify your investing goals and the types of investing decisions that would, or would not, be the right fit for you. You can also use the statement when reviewing your portfolio performance, to gauge how well it is doing compared to your goals.

An investment policy statement is not the same thing as a financial plan. However, if you don’t have a financial plan yet, making an investment policy statement could be a step toward creating one.

What kind of information should you include on your investment policy statement?

Your investment policy statement doesn’t need to include the same information as your financial plan, however, there can be overlap. It can also include your answers to the know your client information your advisor is required to ask you to confirm your identity and to give them a good understanding of your investment style and needs.

Your investor policy should include:

1. What you’re investing for, and when. These are the goals you want to reach, such as retirement, education savings, or other reasons. If you know how much money you need to reach those goals, that’s even better. Your advisor may also be able to help with this kind of financial planning — but it’s important that the goals come from you. You should also decide when you want to reach these goals, so that you’ll have a clear time horizon for your investments.

2. Your investing experience. This includes information about your current investing accounts, how much you already have invested, and how long you’ve been investing. You can also include your level of investing knowledge and how comfortable you are reading documents such as account statements and disclosure documents.

3. How much risk you’re comfortable with. Your rate of return will depend on many factors, including your risk profile. It’s made up of two considerations:
i. Risk tolerance – How much risk you are willing to handle.
ii. Risk capacity – How much risk you can endure financially.
If your risk tolerance is very low, you may also earn lower rate of returns than what you need to reach your goals. If your risk tolerance is very high, you may earn higher returns, but there is a greater likelihood that you will lose some of all of your money. Your risk profile will also affect the asset mix of your portfolio. For example, a conservative investor might hold a higher percentage of their portfolio in fixed-income securities than an investor with a moderate risk level.

3. Your investing strategy. This is related to your investing goals and time horizon. Your strategy also includes the type of asset mix that you prefer, and any investment selection concerns such as ESG investing or a particular industry you want to invest in — or not invest in.

4. How often you want to monitor your investments’ performance. It’s a good idea to meet with your advisor at least once a year, to review how your portfolio is doing. However, depending on your current goals, you may want to meet more frequently. If you don’t have an advisor, set aside time during the year to review your progress.

5. What your current financial picture looks like. Your financial picture includes how much you earn and owe, what assets you own, and how much you already have saved or invested. If you have debt you are repaying, this can affect how much you have available to save or invest over the course of a year.

If you don’t have answers to all these areas right now, start with the ones you do know. The others may be good opportunities to learn more about either before you meet with an advisor, or before you start investing.

Try our investment policy statement worksheet to help you prepare for a meeting with your advisor.

How can you decide your investing strategy?

Your investing strategy is influenced by many factors. Your strategy be a key part of your investment policy statement and your relationship with your financial advisor. If you are not working with an advisor, it’s just as important to define your investing strategy to help guide your decisions. Consider the following components of building your investing strategy:

• Your time horizon for each of your financial goals – Each of your investing goals should have a specific time horizon attached to it, so that you’ll know when you’ll need the money. This also affects steps like how much you should invest each year, and the rate of return you should expect to earn on your investments to meet your goals. You may have a different level of risk associated with different goals, depending on the time horizon. For example, you might apply more conservative strategies with goals that you want to reach within a few years, to avoid the risk of loss.

• Whether you’re investing for growth or income – This decision will be related to your individual investing goals. For example, if your goal is to accumulate a certain amount of money in order to retire, you may need to apply a growth-oriented strategy. There are different ways of doing this, such as a ‘bottom-up’ approach that evaluates companies to invest in based on different metrics. Alternatively, a ‘top-down’ approach considers macro-level economic factors that can affect stock prices in different industries. And income-oriented investing strategies are most concerned with investments that pay regular interest or dividends. Learn more about investing for growth, income, or both.

• How your values may influence your investing preferences – If you have concerns about aligning your investments with certain environmental, social, and governance priorities, then ESG investing may be for you. Consider whether there are certain types of investments or companies you would like to prioritize, or whether there are others you’d like to avoid. For example, an investor with environmental concerns may seek to avoid investing in companies related to fossil fuel production. Learn more about ESG investing strategies.

• Your preferred asset allocation mix – Your asset mix is about how you want to divide your portfolio across different asset classes. The three main types of assets are equities (stocks or shares), cash and cash equivalents (such as GICs), and fixed-income securities (such as bonds). You may also want to include alternative types of investments such as real estate. How you allocate your asset mix will depend on how much risk you’re willing to take on, as well as your time horizon. For example, a fairly risk tolerant investor with a longer time horizon may be willing to allocate more of their portfolio towards equities, and less towards cash equivalents or fixed-income securities. You can also consider how you want to divide your portfolio between different markets (Canadian, U.S., international, or emerging markets).

• How you would manage a loss – Knowing how you would react to a loss in value in your investments, or a drop in the market in general, is extremely valuable for your advisor to know. And if you are investing on your own, it’s good to prepare yourself for the days when the markets decline. It may depend on the goal you are investing for and how soon you will need the money. During any period of market change, you have the choice to either buy (or buy more), sell at the current price, or do nothing. It’s worth considering if you have a tendency towards loss aversion, as this can lead you to respond emotionally during times of market change.

Your investment policy statement can also be part of your annual portfolio review. You can review it when checking in with your advisor, and with yourself, on how your investing strategy or goals have changed over the previous year. There may also have been changes in the market or in your personal life that affect how you want to invest.

What’s your investing personality?

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