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Think of your investment policy statement as a financial destination

Would you take a flight without a set destination? The answer, most likely, is no. So it boggles my mind to hear that people invest their hard-earned money without an investment policy statement (IPS).

Whether you are flying commercial (using an adviser) or are a pilot yourself (DIY), you need to know where you are going.

Few people invest purely as a hobby which means their portfolios are a means to an end. With that in mind, it seems logical to have an established plan. By travelling to a specific destination, you can also periodically look out the window and make sure you are on track.

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An IPS is specific to your investment portfolio, whereas a financial plan is more encompassing and includes things like estate planning, a long-term tax strategy, credit planning, cash flow, etc. An IPS will define your tolerance to loss, what are acceptable and unacceptable investments for you, and what to do in reaction to different market events before they happen. With investing, taking the emotional aspect out of it - or taking advantage of everyone else's emotions - can be a key to success. If investors are proactive as opposed to reactive, I find they are more likely to stick to their guns.

IPS are similar to financial plans in that they can be relatively simple or extremely comprehensive. The benefit of using a financial adviser is that the good ones recognize what you need to see in order for you to be successful.

For example, engineer clients tend to want a veritable tome of information that they can go through by themselves. These IPSs might include Monte Carlo sensitivity analyses that use various models of return distributions and can be more than 20 pages long. Present that to someone who has an aversion to graphs and they'll treat meeting with their adviser like going to the dentist to get a root canal.

Think of it this way: An IPS should be detailed enough that if your adviser were to retire or pass away, your new adviser could pick up right where they left off. It also has to be simple enough that it makes sense to you.

You don't need to understand how the pilot flies the plane, but you certainly want to know where you are going and how much turbulence to expect on the flight.

Preet Banerjee is a senior vice-president with Pro-Financial Asset Management. His website is

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