How to Build a Personal Investment Policy Statement You’ll Follow in a Drawdown
Most investors don’t have an investing problem.
They have a behavior problem.
Not because they’re irrational. Because drawdowns make smart people do dumb things:
they change the plan mid-flight
they sell what’s down and buy what’s up
they confuse headlines with signals
they turn a long-term portfolio into a short-term emotion-management tool
An Investment Policy Statement (IPS) is the antidote.
Not the institutional, 40-page version.
A one-page personal IPS: a set of rules you can follow when markets are loud and your nervous system is not.
This post walks you through building one.
What an IPS is (and what it isn’t)
An IPS is a written agreement between you and you.
It answers:
What is this money for?
What risks am I willing to take?
What do I do when the portfolio is down 10%, 20%, 30%?
What changes are allowed, and what changes are off-limits?
It is not:
a prediction about the market
a list of hot funds
a performance promise
It’s a decision framework.
Why most people abandon their plan in a drawdown
In calm markets, everyone thinks they’re long-term.
In drawdowns, three things happen:
Time horizon collapses. A 10-year plan turns into a 10-day panic.
Loss aversion takes over. The pain of losing feels bigger than the joy of winning.
Narratives hijack the process. Your portfolio becomes a referendum on the latest headline.
A good IPS prevents this by making the hard decisions in advance.
The one-page IPS template (steal this)
If you do nothing else, copy this structure into a doc.
1) Purpose: what this portfolio is for
Write one sentence.
Examples:
“This portfolio funds long-term financial independence and optionality.”
“This portfolio supports my family’s lifestyle, giving, and future flexibility.”
If the purpose is unclear, every drawdown feels like an emergency.
2) Time horizon: how long this money needs to work
Be specific.
Primary horizon: 10+ years / 5–10 years / 3–5 years
Near-term withdrawals expected? Yes/No
Rule: money needed in the next 12–24 months should not be forced to compete in the stock market.
3) Risk definition: what “risk” means to you
Most people define risk as volatility.
High earners often experience risk differently:
needing liquidity at the wrong time
being forced to sell during a downturn
having income tied to the same cycle as markets
Write your top 3 risks.
Example:
“My biggest risk is being forced to sell during a drawdown due to a cash need.”
“My biggest risk is concentration in employer stock + career risk.”
4) Asset allocation: the target and the guardrails
You need two things:
Target allocation (your default)
Bands (how far you can drift before action is required)
Example (illustrative only):
60% growth (global equities)
30% diversifiers (alternatives/real assets)
10% defense (cash-like)
Rebalancing bands:
“Rebalance when any major sleeve is +/- 5% from target.”
The point isn’t the exact mix.
The point is that you have a mix you can defend when it’s not working.
5) Liquidity policy: your drawdown shock absorber
This is the section most personal IPS documents skip.
If you want to follow your plan in a drawdown, you need liquidity.
Define:
your Base Life monthly number
your runway target (e.g., 6–12 months of Base Life)
what counts as “cash-like” (T-bills, money market, etc.)
Rule: the runway exists to prevent forced selling.
6) Contributions and withdrawals: what happens automatically
Write down the default behaviors.
Examples:
“I invest $X/month into the portfolio regardless of headlines.”
“In high-income months, I follow a waterfall: taxes → runway → investing → lifestyle.”
“Withdrawals come from defense first in a drawdown; I avoid selling depressed growth assets unless rebalancing rules require it.”
Automation beats motivation.
7) Rebalancing rules: what you do when things move
Rebalancing is the mechanical way to buy low and sell high.
Write rules you can follow:
Frequency: quarterly / semi-annual
Trigger: bands (+/- 5%)
Method: “sell what’s above band, buy what’s below band”
Important: rebalancing is not market timing. It’s risk control.
8) What would make me change the plan (and what won’t)
This is the heart of the IPS.
List the allowed reasons to change your allocation:
a major life change (sale of a business, retirement, divorce)
a change in cash needs or time horizon
a change in concentration risk (e.g., employer stock)
List the not allowed reasons:
“the market feels scary”
“Twitter says recession”
“my friend made money in X”
If you don’t write this down, drawdowns will write it for you.
9) Drawdown playbook: what I do at -10%, -20%, -30%
This is where your IPS becomes usable.
Write a simple playbook.
Example:
At -10%: do nothing. Review runway. Confirm rebalancing bands.
At -20%: rebalance if bands are breached. Increase communication cadence with your advisor/team. No new “tactical” bets.
At -30%: revisit liquidity needs, not allocation. If still within plan, continue contributions and rebalance mechanically.
You’re not predicting the bottom.
You’re preventing a permanent mistake.
10) Accountability: who keeps me honest
Even a one-page IPS works better with accountability.
Write:
who you’ll call before making a major change
what data you’ll review (not headlines)
how long you’ll wait before acting (a 72-hour rule helps)
The simplest version (if you want to start today)
If a full IPS feels like a lot, start with these five lines:
Purpose:
Time horizon:
Target allocation + bands:
Runway target:
Rebalancing rule:
That’s enough to prevent most drawdown mistakes.
Bottom line
A personal IPS isn’t about being “right.”
It’s about being consistent.
In a drawdown, the biggest risk isn’t volatility.
It’s abandoning your process.
Write the rules now, while you’re calm, so you can follow them later, when you’re not.
