Writing and Maintaining Your Long-Term Investment Policy

What you will learn

• What an investment policy statement is and why it should be written before markets move.
• The sections a complete one-page policy contains.
• How to stress-test your allocation in euros and adjust it to the loss you can accept.
• How to review and change the policy without reacting to headlines.

Explanation

An investment policy statement (IPS) is a short written document that sets out why you invest, how you invest and what you will do in defined situations. It turns the decisions of this course into rules. Its main value is behavioural: in a crash or a boom, you follow a decision made calmly in advance instead of a decision made under stress. An IPS is a personal planning tool, not a guarantee of any result.

Before writing it, the basics from the course "Personal Finance & Money Management" should be in place: an emergency fund and no expensive consumer debt.

The sections of a one-page IPS

1. Purpose and horizon: what the money is for and when you need it (for example "retirement income from age 67, horizon 25 years").
2. Risk capacity and risk tolerance: how large a loss your finances can carry (capacity) and how large a loss you can live with emotionally (tolerance), as a maximum loss in euros, not only in percent.
3. Target allocation and bands: for example "70% global equity ETF, 30% euro government bond ETF, bands ±5 pp" (lessons 7 and 10).
4. Product rules: selection criteria such as broad index, total cost below a limit, fund size, replication and distribution type (lessons 3–5), and a list of excluded products (for example leveraged products, single stocks in this portfolio).
5. Contributions: savings plan amount, date and what happens to bonuses or windfalls (lesson 9).
6. Rebalancing rule: review dates, bands and preferred method (lesson 10).
7. Glide path and withdrawals: how the allocation becomes more defensive as the goal approaches, and how money will be taken out. A simple rule: money needed within the next 3 years is moved out of equities.
8. Tax and admin: Freistellungsauftrag, cash for the Vorabpauschale, records (lesson 12).
9. Behaviour rules: for example "In a fall of 30% I do not sell; I check the rebalancing rule" and "No changes within 48 hours of reading news".
10. Review and change log: one fixed yearly review date, and a dated line for every change with its reason.

Good reasons and bad reasons to change the policy

Good reasons are changes in your life: a new goal, a new horizon, a change in income, family or health. Bad reasons are changes in the market: a recent crash, a recent boom, a forecast or a social media trend. A practical rule: write the proposed change into the log, wait at least one month, and then decide at a calm moment.

Worked example

Hypothetical example: Lena, 38, has €30,000 invested with a 70/30 target (€21,000 in equities, €9,000 in bonds) and saves €400 per month. Her goal is retirement savings with a horizon of about 25 years. To test the allocation, she uses a stress scenario: equities −40% and bonds −5% at the same time. This is an assumption for planning, not a forecast; real losses can be smaller or larger.

1. Equities: €21,000 × (1 − 0.40) = €12,600.
2. Bonds: €9,000 × (1 − 0.05) = €8,550.
3. New total: €12,600 + €8,550 = €21,150.
4. Loss: €30,000 − €21,150 = €8,850, or €8,850 ÷ €30,000 = 29.5%.

Lena writes down: "I accept a temporary loss of up to €9,000 without selling." The test fits, so she keeps 70/30. Her glide path: from age 57, reduce the equity target by 2 pp per year. Her change log has its first line: "Policy written, 70/30, reviewed every January."

Common mistake

Practice activity

You have €50,000 invested with an 80/20 target (equities/bonds). Use the stress scenario equities −40% and bonds −5%. The maximum temporary loss you can accept is €12,000.

1. Calculate the stress loss for 80/20 in euros and percent.
2. Find the highest equity share (rounded to whole percent) that keeps the stress loss at or below €12,000.
3. Then write your own one-page IPS with the ten sections above.

Key takeaways

• An IPS turns your decisions into written rules before markets test you.
• State your maximum acceptable loss in euros and test your allocation against a stress scenario.
• Include allocation, bands, product rules, contributions, glide path, tax admin and behaviour rules.
• Change the policy for changes in your life, not for market news, and log every change with a date and reason.

Next step

Continue with the course "Trading Psychology & Discipline" to understand the biases and emotions that make sticking to any written plan difficult, and how to manage them.