Completing Portfolio Management Project - Final Steps - Reserved for Prof Scofield

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INVESTMENT POLICY STATEMENT

Introduction

An invested policy statement IPS is a drafted document between a portfolio manager and the client mainly outlining the general managerial rules. IPS describes the overall investment goals and objectives of the client as well as defining strategies to be undertaken by the manager in meeting those objectives. Specifically, IPS includes information such as risk tolerance, asset allocation and holding limits and rebalancing. This paper analyzes a typical investment policy statement that guides the portfolio construction and asset management with $100,000 invested in 10 stocks, 3 mutual funds and 2 EFTs.

INVESTMENT POLICY STATEMENT (IPS)

Client description

The client is a young married woman with three children who has worked for five years and is anticipating to retire within the next 15 years. The client wants to retire after attaining financial freedom via investments. Items analyzed below explains more about the clients’ investment policy.

Investment objectives

These entails the need for attaining financial freedom after having built a portfolio of assets that are likely to generate substantive income for enabling the client to retire at an early age, enjoy vacation and be able to give back to the society via the creation of my foundation.

Objective Expectation & goals

It is anticipated that in a period of about ten years, my portfolio funds will be providing for living expenses in addition to saving 30 percent of the investment income. Therefore, 15 years from now the client will retire.

Risk Tolerance

In the financial environment it is considered that high-risk yields a high return. Thus developing this statement attributes to the ability of tolerating uncertainties, inherent volatility and complexities in the investment market. I am looking forward to losing less than 25 percent annually and will not tolerate a loss beyond 50 percent. The primary aim is to maximum the returns.

Holding limits

The development of my portfolio was subject to the particular limitation that outlines the maximum and minimum investment in the following asset class.

· Stocks

· Mutual funds

· EFTs

Target allocation

Based on the previous experience and guidance from those in the investment market, I undertake the following initial assets allocation.

· Stock- not exceeding 67 %

· Mutual funds – not exceeding 20%

· EFTs – not exceeding 13%

Selection criteria

Investment portfolio for executing investment program shall be subjected to a given selection criteria and be monitored for adherence and variation to the investment policy guidelines. Critical areas of selection criteria will include the expense ratio and cost of the funds.

Review process

For effectiveness the performance of the investment will be monitored and reported on a quarterly basis. On annual basis investment program will as well be reviewed hence only making small adjustments.

Rebalancing

Any time whenever there is inadequate cash flow. After six months whenever my assets divert far above 3% from the target. Annually after 10 % market decline.

Conclusion

In conclusion, IPS is important in that it provides rules relevant for the portfolio guidance since it assists in supervising, monitoring and evaluation.