From Zero to Professional Investment (IPS)!

This part of the blog is to help you to stick with your goals and help to create a customised portfolio for you.

When you come first time to wealth adviser Investment Policy Statement (IPS) needs to be prepared. To finds out more information about you and help adviser to provide products that are most suitable for your current needs. The statement is usually reviewed yearly or if your financial situation changes. So we will create one for you…

The primary goal is for you to be decisive and stick to your goals. However, also we will determine what reasonable goals are. Create IPS, and you will remove most of the stress from the investment. The result will be a gift you will make to yourself when you start investing. You will not need concern yourself with market volatility. We will try to get you to a position where your money is working for you within given boundaries, which we will create.

True, it will take some time at first. However, you do it once and later you will need just updating it. You can download a simple copy of IPS here (IPS).

At end I have also attached document form The Great Life Assurance Company. It is quite good summary document for our dicsussion and can be used for your decsion making.


What will be considering in IPS?!?


  • Return
  • Risk


  • Time
  • Liquidity
  • Tax
  • Legal
  • Unique circumstances

Additional information:

  • Target Asset Allocation
  • Diversification
  • Financial Goals
  • Any additional information which is relevant to investment decision making. Like, where you would like to invest.

Now we will go into more detail on each element to help you to learn more about yourself and potential investment portfolio, which you can construct.



We will find out your required return to reach your goals. This part of IPS is very subjective.

First, you need to decide how much money you would like to save in the future (your goals). Then find out how much money you have saved so far. Then use a financial calculator or online tools to compute what return should be in coming years to achieve your goal. In next segment, we will look into how risk may affect our return results.


The best way to show this is via example. Say our friend John wants to by Aston Martin.

  • Current price for basic Aston Martin DB11 would be around £155 000. This will be set as our future value.
  • John is doing well with his savings and investment. Was able to save £10 000, which he can invest, without affecting his day to day life.
  • John thinks that he will be able to add £500 a month to his portfolio.
  • He is using ISA to invest, so no need to consider tax at this stage.
  • He is 35 and would like to buy a car when he is 45. So we have 10 years.
  • You can use this website to compute: Link
  • The result (I/Y) is ~30%

~30% is very high return. Most successful stock investor Warren Buffet was able to do 24% a year. So John would have to take extreme risk, which he may not be comfortable. Higher risk means that he will invest in greater volatility assets to get his 30%, but may lose even more. We will need to analyze his risk objective further.


Time to have a look into a relationship between risk and return. In particular, ability and willingness to take a risk. We will come back to John’s example as well.

In investment management, a risk is counted using volatility. However, it is tough to evaluate each individuals volatility levels. So investor advisers will employ something called psychological or situational profiling. In this section, we will talk mostly about situational profiling and will have a separate blog on psychological profiling.

Situational profiling – Looking into investors life experience, current financial situation to identify the ability and willingness to take a risk.


  • We are getting back to your goals and how much time you have to reach them. Also look how big are your goals in comparison with a portfolio. Smaller the goal to portfolio more risk you can take.


  • Buy a used car 20 000 in 10 years – more risk
  • Buy new car 155 000 in same 10 years – less risk
  • Buy a used care 20 000 in 5 years – less risk than first and more than middle example
  • How badly you need this new car.
    • In one scenario your are a taxi driver, and the car is required to support your family in the future. Then you have no room for error. You must get a car and be taking huge risk is not an option. When taking a significant risk, you can have higher possibility to lose money.
    • In the second scenario, a car is a luxury. The vehicle is to be used once a week to go to see around a country. You could use a train or bus as an alternative. Then if you cannot buy a car, you still be ok. Resulting in your ability to take a larger risk in your portfolio.
  • Finally, there is a personal decision. You need to ask yourself “How bad can it get before you risk losing major life goals, like going to MBA or buy a family home?”. If you cannot take significant shortfall, then your risk is lower.


Subjective again. Each individual’s experience will be different. Say you had some significant losses in the past. Do not stress out much if you see some negative numbers. For example, portfolio goes down 15%, and you are ok, then you have higher willingness to take a risk.

If you are afraid to see even a single % decrease below starting value, then you will not be able to take high risk and have low willingness to take a risk.

Your overall risk level will be the lowest of two ability and willingness.

Back to John and his need to buy Aston Martin worth 155K.

Ability – John could buy any cheaper car so this would increase its capacity to take a risk. If he does not get his Aston, he can buy any other model. However, his time period is quite short 10 years in relation to required final value. Thus, little room for mistake and risk relatively lower, if he really wants/needs Aston. Out off all these arguments look like that the importance is the strongest. Say also we find out that 10K investment is just small part of his overall pension fund, which is 250K already. Then situation just change makes his ability much higher. If he loses his 10K, he still will have funds when he retires.

Willingness – John inherited most of the pension portfolio, do not have much experience in investment and stress out if portfolio goes down below 5%. It looks like John has quite low willingness to take a risk.

So we will end up saying that John has low willingness to take a risk.

Also conclud that he John needs to reconsider his goals in buy Aston. As the amount of risk to take will be higher than John can handle. Also in real life, you could realisticly expect around 4-6% return in an average risk portfolio.



Next section we will look into primary Constraints that need to be taken into consideration, when making financial decisions. These are almost as important as your Risk and Return as makes sure all is considered when making a financial decision.


Here we will examine how many periods you will have in life. You may ask “How do you decide?” The different period starts when you have a considerable change in a financial situation or cash flows.

Let’s back to John. John is 35 and is expecting his first baby daughter. Also, let’s assume he would like to buy a relatively expensive car and a house in 10 years.

So Johns first period will be from now 35 to 45 when he buys a car and a house for a family.

The second period will be from 45 to 53, where his daughter will start university and John will need to contribute. After uni daughter will become independent.

The third period will be from 53 to 60 when John will retire.

The final period is retirement, where John will be spending all money he managed to save over his life.


This is something you need consider now. How much cash/liquid asset you need. Are you going to buy a house or going to uni. These should not be regarded as a current investment portfolio.

Say John will need to buy baby items like bed or toys. All will cost him 20K. This is his liquidity needs for a coming year.


Need to consider specific tax rates are applicable to your:

  • Income (stats with 20% after Personal Allowance (Link))
  • Dividend
    • Lower threshold 7.5% from £0 to £43,000 of taxable income over the Personal Allowance
    • Mid threshold 32.5% from £43,001 to £150,000 of taxable income over the Personal Allowance
    • 38.1% Over £150,000 of taxable income over the Personal Allowance),
  • Capital gain tax (Link).

Also any tax wrap account. For example, in UK you can invest via ISA or for your pension SIPP, where there is no tax.

Usual advice put investment that has the highest tax into tax wrap accounts and investment that has lower tax in a usual investment account. However, early allowance to invest in ISA 20K, which relatively large amount of money for a beginner.


This part relates to any legal requirement you could face. For the individual small investor, there might be no legal issues. Except if you have some special situation. But without further information, you will need to decide by yourself.

Unique circumstances:

In here you add everything that was not covered before. Say you would like to create a trust for your grandkids in 15 years. Quite often, you can fit this into other categories. So here you may not need to add anything.


The last element of IPS are your own preferences. Basically you set yourself some investment conditions.

Target Asset Allocation:

Please have a look at my previous blog (Link) and document attached at the end. You can decide based on your personal situation, how much fixed income and equity will you use for investment. There are quite a few forms of assets. I will go into detail about different classes in future blogs. Rule of thumb look from 25%-75% Bond or Equity. So could be 25% Bonds and 75% Equity or somewhere in between.


Basic rule would be not to invest more than 5% in any same asset. So if you have a portfolio of 1K, this condition might be quite difficult to fill due to transaction cost. But if you get to 10K it becomes a more realistic rule. You can invest around 500 in each asset. Maybe you decide to make some other weights. Say 3% in one stock and 5% in other and keep 2% as cash. All depends on what your beliefs are and if you think that one asset will outperform the other. Whatever is your belief to protect your portfolio 5% is a reasonable condition.

Be careful of your home bias. You may over-invest in UK/home country. So try to make sure that investment in UK is under 50%. Other 50% should be invested in a word portfolio. Some would dispute that 50% is too much in UK, given that world equity portfolio has just 6% of UK stock. But I believe that you have a better comprehension of home country stocks. So more likely you will select a reliable company from UK.

Financial Goals:

This comes from other elements in analyse return, liquidity needs. You set up some realistic investment goals. Like deposit for a house in 5-10 years and not to buy a whole house from a 10K portfolio. Do not deviate from the plan and go crazy with buying and selling stocks. When choosing stocks for the portfolio avoid turnover try to add assets you believe in and happy to buy and hold for most of your life. If no such stock exist or you are not sure, purchase broad market index ETF.

Any additional information is relevant to investment decision making. Like, where you would like to invest.

Here you can cover for yourself, things like Green investment or no investment in commodity-type businesses. Just to keep yourself on the track and not be swayed by hot stocks.

Additional documents:

This was created by The Great Life Assurance Company. I reviewed and see no reason to create something else as for basic needs it is quite good. Please if you use it do not go just on a face value and still think about the personal situation. However, this will push to the right direction. gwl_invesment_personality


  1. […] What you should take from Part 1 and Part 2 approximate investor type you are and start self analysing some personal biases that my cloud your investment jugment. Also start to think, how you could avoid these errors. Quite a few can be avoided with preparing IPS, which I have review in my previous blog (Link) […]



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