An investment policy statement (IPS) is the cornerstone of managing an endowment or foundation. It defines how your assets are invested to support your mission by outlining goals, objectives, and constraints around your investment strategy. When done right, it creates accountability, aligns with your organizational goals and supports long-term sustainability.

Yet, not all investment policies are created equal. Some provide clarity and confidence. Others cause confusion, misalignment, and missed opportunities. Here’s how to spot the signs of an effective investment policy statement.

6 Signs of a Strong Investment Policy

✔ It’s mission-centric and aligned

Every investment decision should reflect and support your organization’s mission. This might mean emphasizing capital preservation or maximizing growth depending on your goals.

What to check for: The policy includes a clear statement linking investment objectives to the organization’s mission and time horizon.

✔ It clearly defines objectives and risk tolerance

A strong policy defines measurable return targets and identifies how much volatility the organization can accept. This helps guide asset allocation.

What to check for: Objectives are specific, realistic, and based on the risk tolerance approved by the board of directors.

✔ It establishes strategic asset allocation guidelines

Asset allocation is the most important factor in long-term investment returns. A well-structured policy defines a range of how much to allocate to equities, fixed income, alternatives, and cash using organizational goals and risk tolerance as the guide.

What to check for: The policy outlines an allowable range for asset classes

✔ It includes a spending policy

Your investment strategy should support the cash flow needs according to your spending policy. If you need stable, reliable funding, your portfolio should reflect that with less risky assets.

What to check for: There’s a clear link between expected spending and portfolio structure.

✔ It includes roles, responsibilities, and governance

Who makes what decision and when? Strong policies define the responsibilities of the board of directors, investment committee, staff, and advisors.

What to check for: The governance structure is clearly defined, including processes for selection and review of managers.

✔ It’s reviewed regularly and updated as needed

Markets change, and so do organizational needs. A strong policy should strike a balance between timelessness and being able to evolve with the needs of the organization.

What to check for: The board should reaffirm the policy on an annual basis to ensure alignment.

5 Signs Your Investment Policy Needs Work

✗ It’s too vague or generic

Policies that use generic language from other institutions or investment advisors often fail to reflect unique organizational needs.

What to check for: No clear investment objectives; asset allocation is missing or superficial.

✗ It’s disconnected from reality

An investment policy that calls for high returns with low risk is a contradiction. So is one that assumes annual liquidity but allocates heavily to illiquid assets.

What to check for: Return assumptions, risk tolerance, or liquidity needs are misaligned with the actual portfolio.

✗ It doesn’t support the spending needs

The asset allocation guidelines should take into account the spending policy needs of the organization and the portfolio’s goal to maintain its purchasing power. A risk for many portfolios is failing to achieve a high enough total return (income plus capital appreciation) to meet spending needs in the distant future.

What to check for: Coordination between spending and investing strategies.

✗ It lacks oversight and accountability

Without clarity on who is responsible for what or when decisions are reviewed, policies can go stale and become misaligned with the organization’s operations and mission. This also increases the risk of conflicts of interest or poor manager oversight.

What to check for: No named roles or process for monitoring investment performance or reviewing managers.

✗ It’s overly rigid or inflexible

Markets and priorities evolve. A policy that locks your organization into an outdated strategy without room to be active and nimble can do more harm than good.

What to check for: No framework for exceptions, adjustments, or special circumstances.

Investment Policy Statements Are a Tool, Not a Task

A good investment policy is a strategic tool. It should bring clarity to your investment decisions, confidence to your board, and alignment with your long-term mission. By regularly reviewing your policy for these signs, you can help ensure your endowment or foundation is well-positioned for growth, resilience, and impact.

The information in this paper is not intended as legal or tax advice. Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.