The question
"I know the ideas now. How do I turn them into rules I'll actually follow when markets get rough?"
The idea
- An investment policy statement (IPS) is a one-page set of rules you write before you need them. Calm-day you writes it; worried-day you follows it. It answers five things:Purpose and time: what the money is for, and when you'll need it.Loss limit: the largest fall from a high you can sit through without selling.Mix: the stock share that fits that limit.Upkeep: when you rebalance and what you'll pay in fees.Review: when you'll change the rules, and what does not count as a reason.
- It builds on sequence risk, regimes and look-through.
Worked example
Alex has $300,000 and won't draw on it for 15 years. We'll use ETFIQ's benchmarks, from 20% to 95% stocks. Their history is hypothetical (each rule applied to past prices). Largest falls cover Jan 4, 2010 to Nov 10, 2026; yearly growth covers calendar years 2011 to 2025.
Rule 1. Purpose. "Retirement in 15 years. No withdrawals before then."
Rule 2. Loss limit. Alex writes: "I can sit through a 25% fall from a high."
Rule 3. Mix. Find the highest stock share whose largest fall stayed within 25%:
| Stock share | Largest fall | On $300,000 | Growth a year, 2011 to 2025 |
|---|---|---|---|
| 20% | −18.74% | $56,220 | 3.97% |
| 40% | −20.32% | $60,960 | 5.54% |
| 60% | −22.31% | $66,930 | 7.06% |
| 80% | −28.15% | $84,450 | 8.51% |
| 95% | −32.74% | $98,220 | 9.56% |
60% fits; 80% doesn't. Alex writes: "60% stocks. Expect falls of about $67,000, or worse: history isn't a ceiling."
Rule 4. Upkeep. "Rebalance to 60/40 when stocks drift above 65% or below 55%, checked each quarter. Keep the blended fee under 0.10%." A 60% VTI, 40% BND mix costs 0.03% a year, $3 on $10,000, per ETFIQ's builder on Nov 10, 2026.
Rule 5. Review. "Once a year, and after a life change. A market fall is not a reason to change Rule 3."
Five lines, each with a number to check.
The common mistake
"I'll set my limit from the worst calendar year." Calendar years hide falls that span two years. The 60% benchmark's worst year lost 15.83% (2022), but its fall from the Nov 8, 2021 high to the Oct 14, 2022 low was 22.31%.
Set a 17% limit from calendar years and the 80% mix looks fine (worst year −16.89%), yet its largest fall was 28.15%, in five weeks of 2020. Use the fall from a high.
Check your understanding
Pick an answer to see why. Two of three right passes the lesson.
1. Why write an IPS before markets fall?Answer: C. So decisions made calmly guide you when you're worried. it carries calm choices into a hard day. Not B: an IPS doesn't change returns; it helps you stick to a plan.2. Sam's loss limit is 21%. Using the table, which is the highest stock share whose largest fall stayed within it?Answer: B. 40%. 40% fell 20.32%, inside 21%; 60% fell 22.31%. Not C: 22.31% is over the limit.3. Alex's 60/40 mix is down 18% from its high. What does the IPS say to do?Answer: A. Keep 60% stocks, rebalancing only if stocks drifted outside 55% to 65%. an 18% fall of the mix is inside Alex's 25% limit, and Rule 5 says a fall is not a reason to change. Not D: changing rules mid-fall is what the IPS exists to stop.
Takeaways
- Write your rules on a calm day: purpose, loss limit, mix, upkeep, review.
- Set the loss limit from the largest fall from a high, not the worst calendar year.
- Pick the stock share on ETFIQ's benchmarks, then build it in the ETF Models builder.