Building Your Investment Policy Statement (IPS)

Why this comes first

"What's the best portfolio?"

It's one of the most common questions I get. It also happens to be the wrong one.

There is no universally "best" portfolio. There is only the portfolio that gives you the highest probability of achieving your goals.

If risk is the probability of not meeting those goals – my favourite definition, and one you'll hear me use a lot – then the best portfolio isn't the one with the highest expected return. It's the one that minimises the risk of failure.

That's why portfolio construction starts with you, not the market.

What are you trying to achieve? How much return do you actually need? How much risk can you tolerate without abandoning the plan halfway through? What constraints are you working with?

Only once those questions are answered does portfolio construction become a solvable problem.

This is where an Investment Policy Statement (IPS) comes in.

Think of it as the operating manual for your wealth. It defines your objectives, your constraints, and the rules you'll follow when markets inevitably stop cooperating.

And that's important, because markets are very good at making smart people do dumb things.

Without a plan, it's easy to drift from one narrative to the next. A bull market turns everyone into a risk-taker. A bear market turns everyone into a capital preservation expert. An IPS gives you something far more valuable than a market forecast: consistency.

In short, an IPS isn't paperwork. It's the foundation everything else should be built on.

The five decisions that matter

A useful IPS doesn't need to be 20 pages long. Mine fits on one page. It contains five key decisions:

1. Your investment horizon.
2. Your required return.
3. Your risk tolerance.
4. Your investable universe.
5. Your behavioural limits.

Every portfolio decision you'll make later can be traced back to one of those five items. Here's mine.

1. Investment horizon

Most investors describe their horizon as "long term". The problem is that "long term" has a habit of shrinking during bear markets.

A better approach is to define a specific date. A date doesn't change because markets fall 20%, a recession arrives, or your favourite strategy has a bad year.

My own horizon is April 2056 – roughly 30 years from today. That's the period over which I'll judge success or failure, not the next quarter or even the next few years.

It's also useful to think about your behavioural horizon: the period over which you'll actually feel performance and be tempted to react. Mine is roughly one year. That's why I want to understand not just how a strategy behaves over 30 years, but also what a typical one-year experience looks like.

My answer: April 2056.

2. Required return

Most investors start with a portfolio. I prefer starting with a calculator (which you find here in the platform).

Your required return isn't determined by market forecasts. It's determined by your goals, current wealth, future contributions, and time horizon. In other words, it should be solved for, not guessed.

It'll give you the return you need to meet your goals – not the one you want.

This exercise often produces an unexpected result: many investors discover they need lower returns than they assumed. That's good news. As my friend Kevin Kneafsey likes to say, why risk something you need for something you don't need?

If the required return comes out implausibly high, the solution is usually to revisit the assumptions rather than reach for a riskier portfolio. Contribute more, spend less, or extend the horizon.

My answer: 5–7% real annualised by April 2056.

3. Risk tolerance

Most investors focus on expected return. The problem is that expected returns are exactly that: expected. They tell you very little about the range of outcomes you might experience along the way.

A portfolio with an expected return of 8% per year won't deliver 8% every year. Sometimes it'll deliver much more. Sometimes much less. What matters is the distribution around that expectation, as well as the path the portfolio takes to get there.

That's why I define risk as the probability of not achieving an objective.

There are two common ways that can happen. The first is through a severe drawdown. Even if a strategy eventually recovers, a large enough loss can cause an investor to abandon the plan before the recovery arrives. The second is through returns that are persistently lower than expected. A portfolio that compounds at 1% real for thirty years may never experience a dramatic crash, but it can still fail to deliver the outcome you need.

For that reason, I prefer to define risk using both a maximum acceptable drawdown and a minimum acceptable long-term return. Together, they capture both the journey and the destination.

The important thing is to think about these numbers in real-world terms. A 50% drawdown sounds manageable in theory. Seeing €250,000 disappear from a €500,000 portfolio during a recession feels very different.

To make this more concrete, use the IPS Risk Simulator. It allows you to estimate the probability of experiencing different drawdowns and long-term return outcomes based on your assumptions. The results aren't forecasts, but they can help set realistic expectations about what you're signing up for.

My answer: maximum drawdown of 50% and minimum annualised real return of 2%.

4. Investable universe

Every portfolio is constrained by the tools available to implement it.

Whether you use UCITS ETFs, US ETFs, futures, leverage, individual stocks, or alternatives will have a significant impact on the portfolios you can build. The same is true for taxes, account structures, and regulatory constraints.

The key is simply to be explicit. Define what is allowed, what is excluded, and under what circumstances exceptions can be made.

My answer: futures, UCITS ETFs and US ETFs across major asset classes, with individual stocks limited to satellite allocations.

5. Behavioural limits

This is the only section of the IPS that I don't remember seeing in any textbook.

The idea came from observing a simple reality: sticking with a strategy is easy when it's outperforming. The real test comes when it's lagging, sometimes for years, while other approaches seem to be working better. That's often the point at which investors abandon a sound process for the wrong reasons.

Institutional investors have governance frameworks and investment committees to help separate temporary disappointment from genuine problems. Individual investors usually don't. They're portfolio manager, risk manager, and investment committee all rolled into one.

That's why I added a behavioural-limits section to my IPS. Its purpose is to define, in advance, how much disappointment I'm willing to tolerate before revisiting the strategy. Not changing it – reviewing it.

I also keep a short investment philosophy document that explains why I own the assets and strategies I do, what I expect from them, and what evidence would change my mind. I've found it to be a useful anchor during periods when performance is testing my conviction rather than my process.

My answer: up to 10 percentage points of annualised underperformance versus global equities over any rolling three-year period before triggering a review.

What next?

You now have the foundations of an Investment Policy Statement — and, more importantly, a framework for every decision that follows.

So put it on paper. I've distilled these five decisions into a one-page IPS you can fill in, sign, and keep: Download the template (PDF). Type straight into it or print it and write by hand – what matters is that today's thinking ends up on a page so the future, panicking version of you can't argue its way around.

Before moving on, I recommend one final exercise: run a pre-mortem.

Imagine it's 2056 and your investment plan has failed. What went wrong? Did you panic during a bear market? Abandon a strategy after a few disappointing years? Take more risk than you could realistically tolerate? Set return targets that were too ambitious?

The goal isn't to predict the future. It's to identify weaknesses in the plan while they're still easy to fix.

Once you've done that, schedule an annual review date. The purpose isn't to react to markets. It's to update the IPS if something meaningful has changed in your life: your goals, time horizon, income, spending needs, or financial circumstances. Market performance, by itself, is not a reason to rewrite the plan.

I also recommend writing a short investment philosophy statement. One page is enough. Explain why you own the assets and strategies you do, what you expect from them, and what evidence would change your mind. Think of it as the reasoning behind the numbers you've just defined.

Finally, establish a simple rule for making changes. Mine is a 15-day cooling-off period. If I want to change a target, constraint, or strategy, I write down the reason and wait 15 days before acting. Most investment mistakes feel urgent in the moment. Very few still look compelling a month later.

Your IPS doesn't need to be perfect. It just needs to be clear enough that the future version of you can understand what today's version was trying to achieve.