What is the initial step in the Investment Policy Statement (IPS) formation process?

The initial step in the formation of an Investment Policy Statement (IPS) involves defining the return objective. This is crucial because the return objective sets the direction for all subsequent investment decisions. By clearly articulating the expected returns, whether in percentage terms or as a specific financial goal, the investor provides a benchmark against which performance can be measured.

Establishing a return objective first ensures that all other components of the IPS, such as risk tolerance, unique circumstances, and liquidity needs, are aligned with this overarching goal. It is essential to have a clear understanding of the return expectations before assessing risk parameters or liquidity considerations, as these factors will inform how the investment strategy is developed to meet those return goals.

This foundational step not only provides clarity to the investor but also helps to establish a framework for how to allocate assets and manage the investment portfolio effectively in pursuit of the stated objectives.