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Tracking & Reviewing

The Investment Policy Statement Revisited

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The Investment Policy Statement Revisited

An IPS written in calm times protects you in volatile ones. But it's not eternal. Once a year, ask whether the world changed or you did—and update only if the answer is yes.

Key takeaways​

  • Revisit your IPS annually (ideally in the same month each year) to confirm it still matches your life
  • Update the IPS only if fundamentals changed: goals, risk tolerance, time horizon, tax situation, or major life event
  • Most years, the answer is "keep it as is." That's the point. The IPS's power is stability.
  • Write a dated memo explaining any changes: what changed, why, and what you updated
  • Use the annual review session (Chapter 10, article 11) as the moment to revisit and potentially update your IPS

What's in an IPS: the standard structure​

If you've already written an IPS (covered in Chapter 1 or another reference), it contains:

  1. Goals: What are you investing for? Retirement at 65 with $3M? Down payment on a house in 5 years? Financial independence?
  2. Risk tolerance: Can you handle a 30% portfolio drop without panic-selling? Or do you need to be 60% bonds?
  3. Time horizon: How many years until you need the money? 10 years? 25 years? 40 years?
  4. Asset allocation: Your target percentages (55/20/25, 60/30/10, etc.)
  5. Rebalancing rules: How often? When (annually, quarterly, by drift threshold)?
  6. Contribution/withdrawal plan: How much per month? From which accounts?
  7. Guidelines: What funds are allowed? What's not allowed? (E.g., "No individual stocks, no leveraged funds, no crypto.")
  8. Review schedule: When and how often will you revisit this?

The annual IPS review checklist​

Once per year, pull out your IPS and answer these questions honestly:

Question 1: Are my financial goals still the same?

  • Did you get married? Now you have joint goals.
  • Did you have a child? New financial obligations.
  • Did you get promoted and salary jump 40%? Maybe your goal changed from "$2M retirement" to "$3M."
  • Did you face a major health issue? Maybe retirement timeline shifted.

If goals changed, update the IPS and recalculate the required contribution and expected portfolio value.

Question 2: Has my risk tolerance changed?

  • Did a crash scare you more than you expected? You might need more bonds.
  • Did you realize you can sleep through volatility? You might increase stock allocation.
  • Did a job loss scare you? You might increase emergency fund and reduce portfolio risk.
  • Did you inherit money? You might have more capacity to take risk.

If risk tolerance changed, your allocation might need adjustment.

Question 3: Has my time horizon changed?

  • Did you decide to retire 5 years earlier? Time horizon is now shorter.
  • Did you decide to work longer? Time horizon is now longer.
  • Did a major expense (college, home purchase) accelerate? Time horizon for that goal changed.

If time horizon changed, asset allocation should shift (shorter time horizon = more conservative).

Question 4: Has my life situation changed in a way that affects investing?

  • Did you move to a different country (tax situation)?
  • Did you start a business (more income, higher tax bracket)?
  • Did you get divorced or married (joint vs. individual goals)?
  • Did you become disabled or face a health crisis?

These changes affect either risk tolerance or goals or both.

Question 5: Have tax laws or market conditions changed in a fundamental way?

  • Did the government pass a major tax law change affecting your account type? (E.g., changes to IRA contribution limits or Roth conversion rules.)
  • Did inflation change permanently? (E.g., if inflation is now 4% instead of 2%, you might want 1% more stock exposure.)
  • Did interest rates settle at a new level? (If bonds now yield 5% instead of 2%, your expected return changes.)

These are less common, but they can justify IPS updates.

The decision tree: keep it or update it?​

When NOT to update the IPS​

The IPS gets misused when investors update it for the wrong reasons:

Don't update because:

  • Markets are down. A down market doesn't change your goals, risk tolerance, or time horizon. Don't use a crash as an excuse to get conservative.
  • You're chasing performance. "Tech stocks are up 40%, I should increase my tech exposure." No. Your allocation is matched to your risk tolerance and goals, not to recent performance.
  • You feel bored. A flat year of 3% returns is normal. Your IPS account for volatility, so boredom is expected.
  • You read a blog about a "new strategy." Allocations change over time, but they change for reasons (life changes, risk tolerance), not because a new strategy is trendy.
  • You got a tax refund. Great, that's a contribution decision, not an IPS change.

The IPS protects you by being stable. The enemy of the IPS is "improvement creep"—constantly tweaking it because something feels wrong. Most feelings pass. Most tweaks make things worse.

Real example: an IPS update from life change​

Original IPS (written 2020, age 35):

  • Goal: $2.5M by age 65 (30-year horizon)
  • Risk tolerance: High (can handle 35% drops)
  • Allocation: 60% stock / 10% international / 30% bond
  • Annual contribution: $20,000
  • Rebalancing: Annually

Annual review 2024 (age 39):

  • Question 1: Goals changed? Yes. Got married. Joint goal is now $3.5M by age 65 (for two people's retirement).
  • Question 2: Risk tolerance? Mostly same, but spouse is more conservative. Joint tolerance is now "moderate-high."
  • Question 3: Time horizon? Same (26 years to retirement).
  • Question 4: Life situation? Married, two incomes, one child. Need more emergency fund. Tax situation more complex (joint taxes).
  • Question 5: Tax/market changes? No significant changes.

Decision: Update IPS.

Updated IPS (2024):

  • Goal: $3.5M by age 65 (joint, two people)
  • Risk tolerance: Moderate-high (spouse more conservative, so reduced to 30% drop tolerance)
  • Allocation: 55% stock / 20% international / 25% bond (more conservative than before)
  • Annual contribution: $30,000 (joint income higher)
  • Emergency fund target: $35,000 (three couples' monthly expenses)
  • Rebalancing: Annually, or when drift exceeds 5%

Memo filed with updated IPS:

IPS Update Memo — October 2024

Changes made:
1. Goal increased from $2.5M to $3.5M due to marriage and combined financial life.
2. Allocation shifted from 60/10/30 to 55/20/25 due to spouse's more conservative preferences.
3. Annual contribution increased from $20k to $30k due to higher joint income.
4. Emergency fund target increased from $25k to $35k to cover household of three.

Why:
Marriage changed goals (combined $3.5M is sufficient for two retirements), risk tolerance (spouse prefers lower volatility), and cash flow (higher income allows higher contributions).

Review next in October 2025. If no material changes, this IPS is valid for 5 years (2024–2029).

This memo documents the change and the reasoning. Next year, you'll compare actual results to the updated targets.

When to update versus when to rebalance​

This is a common confusion:

Rebalancing = adjusting your portfolio back to your target allocation (e.g., if US stock drifted to 58%, you sell enough to bring it back to 55%). This happens annually or when drift triggers. It's not changing your IPS.

IPS update = changing your target allocation, goals, or rules because your life or risk tolerance changed. This happens once per year (if at all) and requires written documentation.

Most people rebalance every year. Most do not update the IPS; they confirm it's still valid.

The five-year IPS checkpoint​

Some investors do a deeper review every 5 years instead of annually:

Annual IPS review (10 minutes):

  • Are goals, risk tolerance, time horizon, and life situation the same?
  • If all yes, file a memo: "IPS confirmed valid, no changes."
  • If any no, update.

Five-year IPS checkpoint (1 hour):

  • Deep dive: reread the entire IPS.
  • Recalculate whether you're on track (using your cashflow model).
  • Ask: "If I were writing this IPS today, would it be the same?"
  • If yes, update the IPS to today's date. If no, revise.

This two-tier approach reduces unnecessary reviews (most years are confirmations) while catching drift over longer periods.

What happens if you don't update when you should​

If your life changes but you don't update the IPS, problems emerge:

Scenario 1: Job loss, but you don't update the IPS.

  • Your IPS says contribute $2,000/month and keep 5% cash.
  • You lose your job, but you don't update the IPS.
  • You're forced to tap your portfolio for living expenses, derailing your allocation.
  • Meanwhile, you're panicking because the IPS isn't realistic.

Fix: Update the IPS immediately after job loss. Reduce contributions to $0, increase emergency fund target to 9 months, shift allocation more conservative for the transition period.

Scenario 2: Divorce, but you don't update the IPS.

  • Your IPS targets $3M joint retirement.
  • You divorce, now it's $1.5M individual.
  • But you keep contributing at the joint rate, and you over-save.
  • Or you under-save because you don't adjust goals.

Fix: Update the IPS within months of divorce. New goals, new contribution plan, new risk tolerance.

Scenario 3: Inheritance, but you don't update the IPS.

  • You inherit $500,000 but don't update the IPS.
  • You're still on track to hit your goals, so you don't change allocation.
  • But now you're over-capitalized. You could retire 5 years earlier.
  • You miss that opportunity because you didn't revisit the plan.

Fix: Update the IPS within months of inheritance. New starting balance, possibly new goal (earlier retirement, higher lifestyle, more charitable giving).

Protecting the IPS from emotion​

Your IPS is a contract with future-you, written in a calm state. To protect it:

  1. Store it physically and digitally. Print it and file it. Also keep a digital copy in cloud storage.
  2. Review it only at a set time each year. Don't randomly pull it out when you're emotionally triggered by a market drop.
  3. Require a written memo to update it. You must write down what changed and why. This forces you to be honest about whether it's truly a life change or just a market mood.
  4. Tell someone about it. Share your IPS with a spouse, trusted friend, or advisor. External accountability makes you less likely to abandon it.
  5. Write the rule in the IPS itself. Include: "I will not update this IPS due to market conditions, recent performance, or emotional reaction. I will update only if my goals, risk tolerance, time horizon, or life situation fundamentally changes."

Next​

This concludes Chapter 10: Tracking and Reviewing. You've learned to pull data (portfolio tracking stack), manage emotions (when not to look), maintain discipline (journaling, annual reviews), handle complexity (fees, taxes, dividends), and plan for the future (modelling, IPS updates). The next chapter shifts focus: having built and maintained your portfolio, how do you retire and draw income from it? That's Chapter 11.