In my recent “Do It Together” (DIT) post, I talked about the importance of developing a comprehensive life plan prior to diving into discussions around what investments to buy. With your financial life plan complete, the next step is to define your investment plans in the form of a written Investment Policy Statement (IPS).

What’s the difference between your financial life plan and your IPS? Your financial plan is more about the “who” and “what” pieces in your life: What are your life goals? Who do you want / need to support financially? What are your assets and debts?

Your IPS is for addressing the “how” questions. How much wealth are you seeking to accumulate and/or preserve? How much risk can you – and should you – accept? How will your Do-It-Together advisor be assisting you along the way?

In short, if your financial life plan describes your desired destination, your IPS is the dependable little engine to see you through the curves, inclines and switchbacks that you are going to encounter along the way.

Your IPS is more than just a conversation and a handshake. It should be put into writing as an agreement that you and your advisor sign. It acknowledges our mutual commitment to following the course that we have chosen together – the course that represents your best interests and your highest (albeit not guaranteed) odds of success.

When questions arise, your IPS offers a reference point for everyone involved. For example, in volatile markets, it’s common to second-guess your plans. This happens, not because your plans have changed, but because it’s human nature to flee bad news and chase bubbles. Decades of empirical evidence makes it clear that these flights of fancy are more likely to send you off course than to yield desirable outcomes. Your IPS gives us something solid to point to. It reminds us why we chose the allocations that we did, and why it’s not in your interest to change them unless your personal circumstances have changed as well.

Over time, your IPS also comes in handy if market shifts cause your portfolio to drift off-course from its original design, resulting in too much or too little market exposure for your goals. When this occurs, your IPS becomes our essential blueprint to guide a disciplined rebalancing of your portfolio back to its intended allocations – and onward to your intended goals.

How do we implement DIT Rebalancing? Find out in my next post.