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By Jason Stipp | 01-11-2011 12:26 PM

Your Portfolio's Best Friend

Morningstar's Christine Benz highlights how an Investment Policy Statement can keep you focused and on track to meet your goals.

Jason Stipp: I'm Jason Stipp for Morningstar.

As you are opening your portfolio in January to review your performance, you might have fund companies' statements with you, a calculator, maybe your watch list. But there might be a critical piece of paper that's missing that could have a profound impact on your ultimate results.

Here with me to tell us a little bit about that is Morningstar's Christine Benz, director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So there is one important piece of paper that might be missing in a lot of folks' assessments of their portfolio. What is it, and why is it important?

Benz: It's the Investment Policy Statement, Jason, and I was trying to think of a good analogy. I was thinking, well, it's like cooking without a recipe, but it's really worse. It's like trying to build the house without blueprints. So cooking without a recipe, sometimes that'll turn out well. Building a house without blueprints will rarely turn out well.

So, essentially, this is a document; this IPS or Investment Policy Statement lays out what you're hoping to achieve with your investments, generally, what type of investments you are holding, and what you're looking for in each of them.

And it also gives you a document for monitoring that portfolio on an ongoing basis. So how often you'll check up, what you'll be looking for when you check up, and also, when you'll make changes, so what will be the catalyst to make changes.

Stipp: So investors might be putting money away for a lot of different goals. Should you have a bunch of different Investment Policy Statements to make sure that you're on track for all of those?

Benz: Well, I don't think you need to get too complicated, but if you do have a few major goals in your life, so for a lot of families, maybe it's investing during retirement, and maybe you also have a pool of assets that you're hoping to leave to your children. So those might be two separate Investment Policy Statements.

Or if you are a younger person, saving for college for a child, as well as saving for your own retirement, those would merit two separate policy statements.

But I don't think you need to get super cumbersome and have a policy statement for every separate financial account. I think you need to aggregate a little bit, focus on those big-picture goals.

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