The Constitution of Wealth: Drafting the IPS
The Constitution of Wealth: Drafting the IPS
Removing emotion from the equation: How the Investment Policy Statement (IPS) governs asset allocation and risk.
Executive Summary
- The Rule Book: The IPS is a binding contract between the family and the investment committee. It defines what to buy, when to sell, and how to measure success.
- SAA vs. TAA: It establishes the Strategic Asset Allocation (SAA) for long-term goals (10yr+) and allows limited Tactical Asset Allocation (TAA) for short-term opportunities.
- Rebalancing Protocol: It mandates automatic trimming of winners and buying of losers when portfolio weights drift beyond set ranges (e.g., +/- 5%).
The “Style Drift” Risk
Without a written IPS, managers often chase “hot trends” (Style Drift), exposing the portfolio to unauthorized risks. The IPS acts as the legal guardrail to prevent this behavior.
Mechanic: The Governance Grid
CPI+4%
Return Target
-15%
Max Drawdown
+/- 5%
Drift Range
Annual
Review Cycle
Simulation: Rebalancing Alpha (Emotion vs. Rules)
10-Year Portfolio Outcome (Volatility Dampening)
| Component | Role in IPS | Key Metric |
|---|---|---|
| Strategic (SAA) | Long-term Anchor (10+ Yrs) | Target Weight (e.g., 60/40) |
| Tactical (TAA) | Short-term Alpha (1-3 Yrs) | Allowed Drift (+/- 5%) |
| Spending Policy | Liquidity Management | 4% Safe Withdrawal |
“The market is a device for transferring money from the impatient to the patient. The IPS is the document that enforces patience.”
Essential Resources
INTERNAL
BMT Playbooks