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Do you have an IPS (investment policy statement)?

M Dixon1

  • 1Plante & Moran Financial Advisors, Southfield, MI, USA.

Michigan Health & Hospitals
|August 5, 1997
PubMed
Summary

Asset allocation policy drives nearly 92% of investment return variation over the long term. Documenting your desired asset allocation policy in an Investment Policy Statement (IPS) is critical for portfolio success.

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Area of Science:

  • Finance
  • Investment Management
  • Behavioral Finance

Background:

  • Academic research consistently analyzes factors influencing investment returns.
  • Understanding the primary drivers of portfolio performance is essential for investors and financial advisors.
  • The relative impact of asset allocation versus market timing and security selection remains a key area of study.

Purpose of the Study:

  • To quantify the long-term contribution of asset allocation policy to investment return variation.
  • To highlight the critical importance of a well-defined asset allocation strategy.
  • To emphasize the necessity of documenting investment guidelines in a written Investment Policy Statement (IPS).

Main Methods:

  • Analysis of long-term academic studies on investment return drivers.
  • Statistical examination of variance in investment returns attributed to different factors.
  • Review of established financial literature on portfolio management principles.

Main Results:

  • Asset allocation policy accounts for approximately 92% of the total variation in investment returns over the long term.
  • Market timing contributes less than 2% to return variance.
  • Security selection accounts for less than 5% of return variance.

Conclusions:

  • Asset allocation is the most significant determinant of long-term investment performance.
  • A documented Investment Policy Statement (IPS) is crucial for establishing and adhering to a strategic asset allocation.
  • Focusing on strategic asset allocation is paramount for achieving investment objectives, rather than tactical market timing or security selection.

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