By Dr. Erik Hofmeister, WCI Columnist

The Investor Policy Statement (IPS) is an essential component to your financial success. It outlines your goals, investing strategy, spending strategy, progress plan, etc. If you don’t have one, WCI's Fire Your Financial Advisor course will help get you there. Once you have one, though, it isn’t set in stone. It’s a living document—subject to change as your life circumstances change. One of my favorite parts of Dr. Jim Dahle’s IPS is the provision to wait three months between wanting to make a change to the IPS and actually doing so.

So, why, when, and how do you go about changing your IPS?

 

Why to Change Investor Policy Statement

We wrote our Investor Policy Statement in 2019 and reached financial independence in 2022. We are now looking at retiring relatively soon. After we reached FI, I thought about the quote, “Once you’ve won the game, stop playing.” It occurred to me that we might need to change the IPS, and we certainly will need to change it once we’re retired. Here are some reasons you may want to change your IPS.

 

Life Circumstances

Maybe you’ve gotten divorced, maybe you have been diagnosed with a chronic illness and can’t work, maybe you had a child unexpectedly. There are a whole range of events that can occur in your life that impact your finances and vice versa. When your life changes, you may need your IPS to change.

 

Economic Circumstances

Toward the end of 2021, I Bonds became the hot new investment. A 7% return on a safe investment? Sign me up! Now that savings accounts are earning a decent amount, do you still want to have as much in bonds? Jim recently reviewed Avantis funds and concluded that maybe one of them would be a better tax-loss harvesting partner than his current fund. People in the economy are constantly innovating, and the economy is regularly changing. When it does, you may want to re-evaluate your IPS.

However, a note of caution: be careful not to chase performance. Just because an investment has recently done well does not mean it will continue to do so. Also, you don’t have to jump on every apparently great new thing. We decided not to buy I Bonds because dealing with TreasuryDirect seemed like a hassle, and we didn’t really need them to accomplish our goals (the amount we could invest wouldn’t move the needle much for us). Just because you consider changing your IPS doesn’t mean you must do so.

 

Education

Some people are experienced investors by the time they write their IPS, but most of us aren’t. The IPS is a document we created relatively early in our personal finance education. Recently, Dr. Rikki Racela mentioned that his IPS didn’t include Backdoor Roth IRAs, but he made the change when he learned more about finances. You may discover that you can do tax-loss harvesting or you may come to believe that a small factor tilt will be helpful. These are concepts the newer investor is unlikely to include in their IPS. Think of the diagnostic approach between a fourth-year medical student and an attending: their behaviors change with their level of experience. As you learn more, you may need to change the plan you made as a novice.

More information here:

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When to Change Investor Policy Statement

Below are some milestones when you might want to change your IPS.

  1. When your emergency fund and insurance are fully taken care of. Your basic financial ducks are all in a row, and now you can start thinking about where to direct incoming money: paying off debt, investing, or both.
  2. When you can max out your retirement accounts. Now you’re saving enough that you need to consider a taxable account. You may need to think about asset location as well as allocation.
  3. When you pay off your student loans. Now all your income can go toward investments, so maybe you consider how aggressive you want to be.
  4. When you reach FI. You have “won the game” so you may want to de-risk slightly.
  5. When you are close to retirement (<5 years). A bond tent may be an effective way to manage the sequence of returns risk.
  6. When you stop working full-time for money (retirement). You will probably need a significant rewrite as you move from accumulation to decumulation.

More information here:

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How to Change Investor Policy Statement

I am a big believer in not doing anything too hastily when it comes to your finances. Remember, life is a marathon, not a sprint. You have time to make deliberate, thoughtful changes. Making rash changes may make you more likely to make an error (e.g. buy Bitcoin now!). Once you have identified the potential need to change your IPS, I suggest the following strategy:

  1. Choose one element you think needs to be changed in your IPS. Try not to make a bunch of changes at once.
  2. Review your current financial situation in detail. If you don’t do this monthly, you should get caught up on where all your investments are and where your money is before making any decisions.
  3. Tentatively rewrite the section of your IPS. For example, if you want to include I Bonds in your bond portfolio, you might change “Invest 10% of portfolio in broadly diversified low-cost bond index funds” to “Invest 5% of portfolio in broadly diversified low-cost bond index funds and 5% into I Bonds.” You might also need to consider language about how to make the change. For example, “Invest new savings into bonds as follows: 5% into low-cost index funds and 5% into I Bond purchases on a quarterly basis.”
  4. If you have a partner, review the change with them and make sure they understand and agree with it. If there is disagreement, discuss it until you have resolved it. The IPS should be a document for the whole household, and the whole household should be on board with it.
  5. Sit with the change for a while. I like Jim’s three-month time, but you could wait a month or even six. Revisit the change after the set amount of time and make sure this is still a change you want to make.
  6. Execute the change.
  7. Revisit the change at your end-of-year financial review. Was it easy to do? Do you still feel good about it? Did it accomplish what you wanted? If so, great! If not, you can always revert or rewrite the section.

We’ve changed our IPS three times over the years, primarily as our savings increased and we hit FI. Each time the change was strategic and consistent with our goals, without being a particularly massive change. The first change was to describe allocations to our retirement accounts, as we could now maximize them. The second change was to direct future savings to create a bond tent as we head to retirement. The third change was to put some of our 403(b)/457 savings into Roth versions.

The IPS is an essential tool for your financial development. Don’t let it stagnate as your life changes, and don’t be too hasty to change it in the interest of chasing performance. Slow and steady wins the race.

What kind of changes have you made to your own IPS? Are there changes you're looking to make in the future? What other strategies could you use to make a change?