Investment Policy Statement (IPS) for Sample Balanced Portfolio

Note: While there are different ways of developing a portfolio's IPS, the IPS for this Sample Balanced Portfolio has been constructed using the format discussed in our Classroom: Portfolio Design - Step 9. And don't forget about the new Investment Policy Statement template in the IFM Tools section. It can make the creation of your IPS quick and easy!

  • Investment Portfolio's Purpose: The Balanced Portfolio’s primary objective is to safe-guard our savings and to earn a reasonable investment return that assists in the accumulation of a retirement fund. At a future date, the balanced portfolio will be used to provide additional income in our retirement.
  • Dollar Value of the Portfolio: Initially our total savings, which currently has a combined value of $100,000.00, will be included in the investment portfolio. At present, we are not contributing additional savings on a regular basis and we do not anticipate the need to make any withdrawals from the portfolio. All income received, interest, dividends and capital gains/losses will be retained by the portfolio and reinvested according to the portfolio's IPS.
  • Scope: This IPS is for all of our financial and investable assets as a total, regardless of how many accounts and account types the investments are held within. The portfolio represents the total amount of investments. However, the scope of this IPS does not include our family’s Registered Education Savings Plan (RESP), which is invested and managed separately and has a shorter investment time horizon. The RESP has its own IPS.
  • Portfolio's Time Horizon: The purpose of the portfolio is to safely accumulate savings that can generate an income to help support our retirement. We plan to retire in approximately 20 years, in 2030. It is expected that in retirement the portfolio will shift from accumulating savings to paying a steady income stream.
  • Risk Parameters:The portfolio’s first priority is to minimize the risk of long-term capital losses and then to maximize the earned investment income and capital gains. The investment quality guidelines are as follows:
    • Guaranteed Investment Certificates (GICs):  Only GICs issued by companies that are fully insured by the Canadian Deposit Insurance Corporation (CDIC) or an equivalent provincial insurance program will qualify as investments.
    • Bonds and debentures: Only bonds and debentures that maintain a credit rating of BBB or higher will be considered for the portfolio. The credit rating must be from an established credit rating agency, such as Dominion Bond Rating Service (DBRS) or the Standard & Poors.
    • Preferred Shares: Only preferred shares of Canadian issuers that receive a credit rating of P-3 or higher, from an established credit rating agency, will be considered as eligible for the portfolio.
    • Common Shares:  The common shares of publicly traded, senior Canadian and foreign corporate issuers with a proven history of paying regular, quarterly or annual, dividends will be considered as eligible investments for the portfolio.
    • Exchange Traded Funds (ETFs):  ETFs that track an established index that is independent of the ETF managing institution will be considered as eligible investments for the portfolio. Just as with common shares, the ETF must have an established history of paying a regular, quarterly or annual, distribution of investment income earned.
    • Inverse Exchange Traded Funds (ETFs): The portfolio is permitted to invest in ETFs that are structured to perform inversely proportionally to its underlying index as a defensive strategy against potential capital erosion from a declining stock market. This strategy is to be used as a substitute for selling individual common share positions and thereby disrupting the portfolio's dividend income stream.
    • Leverage or Margin: The portfolio is not permitted to borrow against its current investments, either by way of a margin account or bank loan, and the portfolio is not permitted to invest in any investment structures that use a leverage component. 
  • Expected Investment Rate of Return: It is expected that the investment portfolio will earn 6.0% per year. We expect the investment portfolio to generate an annual dividend and interest income of approximately 4.0% and the Growth investments to add 2.0% capital appreciation to the overall portfolio. We expect the GIC to earn approximately 3.25% in interest income, per year; the bonds to earn approximately 4.25% in interest income. The preferred shares are expected to earn approximately 6.26% in dividend income. The common shares and ETFs are expected to earn approximately 4.00% in dividend income and approximately 6.50% in capital appreciation. 
  • Investment Approach: Because we view our investing activities as secondary to our savings activities, our investment approach must support our ability to accumulate savings and it must adhere to the following basic philosophical objectives.
    • Objective #1: Our investment portfolio must provide a consistent and, if possible, an increasing dividend and interest income stream.
    • Objective #2: Our investment portfolio must provide an expanding capital base, either as a result of additional savings contributions, accumulated income or capital gains, required to achieve Objective #1, after inflation and taxation.
    • Objective #3: Our investment portfolio must avoid risks that interfere with your ability to achieve Objective #1.
  • Liquidity Considerations: We do not anticipate needing to withdraw any funds from the portfolio prior to our retirement.
  • Asset Allocation: The portfolio will allocate no less than 70% to Fixed Income investments (GICs, bonds, preferred shares), and no more than 30% to Growth Investments.
    • By Investment Type: GICs and bonds will constitute no less than 50% of the portfolio. Preferred shares can be held to a maximum of 20% of the portfolio, and common shares and ETFs will not constitute more than 30% of the portfolio.
    • By Account Type: The individual investments will be allocated to specific account types in an effort to minimize the income tax impact upon the portfolio. For example, high-tax investments such as GICs and bonds should be allocated first to tax-free accounts (TFSAs), and then sheltered from tax in tax-deferred Registered accounts (RRSP, RRIF, etc.). Those investments that pay dividends and potentially create capital gains should be held in taxable accounts.
  • Diversification: The portfolio will diversify its investments according to the following guidelines:
    • Number of Investments Held:
      • The portfolio will hold a minimum of five individual bonds, GICs and preferred shares. No more than 10% of the portfolio will be invested in any single issuer or company, unless the investment maintains a government guarantee.
      • The portfolio will invest in the common shares and ETFs of no fewer than 10 individual issuers and it will not hold more than 20 positions. When investing in the stock market, the portfolio will invest equal amounts in each individual investment. All re-balancing adjustments will be made with this Equal-Weight investment approach in mind. (For more information on Equal-Weight vs Market Capitalization investing see the S&P's recent publication - 10 Years Later: Where in the World is Equal Weight Indexing Now?
    • Sector and Geographical: With the portfolio’s primary focus to safeguard and accumulate savings for retirement, Growth investments in cyclical sectors and foreign regions are not permitted in an effort to minimize the portfolio’s market cycle volatility and currency exchange risks.
    • Maturity Schedule: The Fixed Income investments will be invested such that their maturity dates will span four individual years or more. 
  • Investment Costs: Our goal will be to keep the portfolio's average annual investment costs to a minimum, preferably less than 0.25% of the portfolio's current market value. By utilizing individual securities and maintaining a maturity schedule spanning four years or more, maintaining low investment costs should be achievable.
  • Monitor, Measure, Re-balance: Every quarter a portfolio summary will be completed to provide a snap-shot of the portfolio’s asset allocation, Fixed Income maturity ladder, and to list current investment thoughts and concerns. Potential future investment changes are to be outlined quarterly. The quarterly Portfolio Summary and the Annual Performance Summary will enable the portfolio’s success or failure to be gauged when compared with the Projection of Future Portfolio Values. Annually, the portfolio’s value will be compared to the current projected value expressed in the projections to assess the need for change to the asset allocation, IPS and/or the Projection of Future Portfolio Values assumptions. For example, if the portfolio’s current value is close to the value expressed in the projections, then no changes are warranted. If the portfolio’s current value exceeds the portfolio’s projected value, then the portfolio should be rebalanced with the profit securely reinvested in bonds/GICs or preferred shares. If the portfolio substantially lags the portfolio’s projected values, then further review is required. The individual investments, the asset allocation, IPS and the assumptions used in the Projection of Future Portfolio Values should all be reassessed to ensure they are realistic.
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