Assets for Liability Matching Portfolio?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
Bustoff
Posts: 2033
Joined: Sat Mar 03, 2012 5:45 pm

Assets for Liability Matching Portfolio?

Post by Bustoff »

Is there any guidance on what assets and in what percentages to use for constructing a Liability Matching Portfolio?
I recently finished "Ages of the Investor" and Bernstein discusses three major LMP strategies: buying a TIPS ladder, deferring SS to age 70 and inflation adjusted fixed annuities. At the age of 60, I don't think I have the time or know how to construct a TIPS ladder, and Inflation adjusted SIPA's are too expensive. Would short-term bond funds and CD's be an appropriate substitute ?
Also, is there any allocation guidance available for constructing the risk side of a LMP?
Last edited by Bustoff on Sat Nov 23, 2013 10:44 am, edited 1 time in total.
staythecourse
Posts: 6993
Joined: Mon Jan 03, 2011 8:40 am

Re: Assets for Liability Matching Portfolio?

Post by staythecourse »

The basics of an asset to fill this purpose should be short (to keep up with increasing inflation or worst case unexpected inflation), be liquid, and be safe (low risk of default). CD's, high yield saving account, t-bills, TIPS ladder, and even short term bonds (less then 1-2 yrs. duration) should be fine.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
User avatar
Aptenodytes
Posts: 3786
Joined: Tue Feb 08, 2011 7:39 pm

Re: Assets for Liability Matching Portfolio?

Post by Aptenodytes »

SPIAs can't be any less attractive than CDs and short-term bonds. They all key off the same credit markets. If you don't want to lock in a long-term annuity buy a short-term one.

You didn't mention your reaction to deferring SS, but that's a very cheap way to do LMP.

While it might seem a bit complex to construct a full-blown TIPS ladder from scratch, you can get most of the same benefit through simply buying TIPS each year that mature when you need them. For the sake of illustration, assume you want to have $30,000 in TIPS maturing each year, and that you think the 10-year yields are more attractive than the 5-year yields, and that you need to start spending at age 65:

age 60 buy $30K 5-year, $30-K 10-year
61 $30K 5-year, $30-K 10-year
62 $30K 5-year, $30-K 10-year
63 $30K 5-year, $30-K 10-year
64 $30K 5-year, $30-K 10-year
65 $30-K 10-year
66 $30-K 10-year
67 $30-K 10-year
68 $30-K 10-year
69 $30-K 10-year
70 $30-K 10-year
71 $30-K 10-year
72 $30-K 10-year
73 $30-K 10-year
74 $30-K 10-year
75 $30-K 10-year
76 -
77 -
78 -
79 -
80 -
81 $30 K 5-year
82 $30K 5-year (repeat )

This approach works if you enough ballast in equities to support the steady purchase of such instruments. This illustration omits inflation but you can take into account by increasing the amount purchased to keep the real amount level. I have this illustration transitioning to 5-year TIPS at age 81 because at some point it doesn't make sense to tie up money in a 10-year ladder. Although you need to buy two baskets of TIPS for the next five years (to have money available at age 65 but get on track to holding 10-year instruments), by age 65 you are just executing one transaction per year.
johnz1001
Posts: 216
Joined: Tue Jan 01, 2013 6:41 am

Re: Assets for Liability Matching Portfolio?

Post by johnz1001 »

This is a good question, and I am wondering about whether a intermediate tips fund with a duration of, let's say, 9 years fit in with a LMP. For example, assume I need $500,000 for my LMP for a 15 year period. I have laddered CDs for about $330,000 that could take care of 10 years of the LMP, and I place the remaining $170,000 in an intermediate tip fund to access in the future at years 11 through 15. Even if interest rates go up, my tips fund should keep up with inflation since I will seek to access the money only after the 9 year duration rate.

Does that sound right?
User avatar
Topic Author
Bustoff
Posts: 2033
Joined: Sat Mar 03, 2012 5:45 pm

Re: Assets for Liability Matching Portfolio?

Post by Bustoff »

Aptenodytes wrote:SPIAs can't be any less attractive than CDs and short-term bonds. They all key off the same credit markets. If you don't want to lock in a long-term annuity buy a short-term one.

You didn't mention your reaction to deferring SS, but that's a very cheap way to do LMP.

While it might seem a bit complex to construct a full-blown TIPS ladder from scratch, you can get most of the same benefit through simply buying TIPS each year that mature when you need them. For the sake of illustration, assume you want to have $30,000 in TIPS maturing each year, and that you think the 10-year yields are more attractive than the 5-year yields, and that you need to start spending at age 65:

age 60 buy $30K 5-year, $30-K 10-year
61 $30K 5-year, $30-K 10-year
62 $30K 5-year, $30-K 10-year
63 $30K 5-year, $30-K 10-year
64 $30K 5-year, $30-K 10-year
65 $30-K 10-year
66 $30-K 10-year
67 $30-K 10-year
68 $30-K 10-year
69 $30-K 10-year
70 $30-K 10-year
71 $30-K 10-year
72 $30-K 10-year
73 $30-K 10-year
74 $30-K 10-year
75 $30-K 10-year
76 -
77 -
78 -
79 -
80 -
81 $30 K 5-year
82 $30K 5-year (repeat )

This approach works if you enough ballast in equities to support the steady purchase of such instruments. This illustration omits inflation but you can take into account by increasing the amount purchased to keep the real amount level. I have this illustration transitioning to 5-year TIPS at age 81 because at some point it doesn't make sense to tie up money in a 10-year ladder. Although you need to buy two baskets of TIPS for the next five years (to have money available at age 65 but get on track to holding 10-year instruments), by age 65 you are just executing one transaction per year.
Aptenodytes - thank you for your very detailed advice. Is there any way to buy these individual TIPS in a tax-advantaged account?
User avatar
Topic Author
Bustoff
Posts: 2033
Joined: Sat Mar 03, 2012 5:45 pm

Re: Assets for Liability Matching Portfolio?

Post by Bustoff »

staythecourse wrote:The basics of an asset to fill this purpose should be short (to keep up with increasing inflation or worst case unexpected inflation), be liquid, and be safe (low risk of default). CD's, high yield saving account, t-bills, TIPS ladder, and even short term bonds (less then 1-2 yrs. duration) should be fine.
Good luck.
staythecourse -Thank you.
Why are TIPS funds never mentioned as a substitute for a TIPS ladder in the context of a LMP ?
User avatar
Aptenodytes
Posts: 3786
Joined: Tue Feb 08, 2011 7:39 pm

Re: Assets for Liability Matching Portfolio?

Post by Aptenodytes »

Bustoff wrote: Aptenodytes - thank you for your very detailed advice. Is there any way to buy these individual TIPS in a tax-advantaged account?
It depends on what restrictions your tax-advantaged account operates under. You need to buy them through a brokerage account, so if your tax-advantaged account permits brokerage transactions, you are OK. My employer's 403b doesn't allow this, so I have to limit TIPS purchases to my various other accounts that don't have this constraint.
redhounds
Posts: 165
Joined: Thu Sep 20, 2012 10:43 am

Re: Assets for Liability Matching Portfolio?

Post by redhounds »

johnz1001 wrote:This is a good question, and I am wondering about whether a intermediate tips fund with a duration of, let's say, 9 years fit in with a LMP. For example, assume I need $500,000 for my LMP for a 15 year period. I have laddered CDs for about $330,000 that could take care of 10 years of the LMP, and I place the remaining $170,000 in an intermediate tip fund to access in the future at years 11 through 15. Even if interest rates go up, my tips fund should keep up with inflation since I will seek to access the money only after the 9 year duration rate.

Does that sound right?
Individual bonds seem like a better way to go for a LMP because you know for sure what value you will have each and every year of the ladder. If you're planning on needing the money in 11 years and interest rates go up 10 years and 11 months from today, your fund value will drop exactly when you need it to be stable. With a fund, it's an average duration. The fund will continue to buy and sell individual bonds. Now, if the fund actually held only bonds that would mature on a specific date, the fund could potentially fit the bill. For regular investments pre-LMP building, funds are probably easier to implement. If I'm interpreting Dr. Bernstein correctly, a short term bond fund would be less of a problem. Maybe one could gradually shift from the intermediate TIPS fund into a short term fund (TIPS or nominals) as the 11 year date gets closer?

Caveat: I just got done reading William Bernstein's "Investing for Adults" series as well as some of the books and authors that he references ("Retirement Portfolios" & Zvi Bodie), so I'm still processing the information and I could be wrong on this.
--Red
johnz1001
Posts: 216
Joined: Tue Jan 01, 2013 6:41 am

Re: Assets for Liability Matching Portfolio?

Post by johnz1001 »

redhounds wrote:
johnz1001 wrote:This is a good question, and I am wondering about whether a intermediate tips fund with a duration of, let's say, 9 years fit in with a LMP. For example, assume I need $500,000 for my LMP for a 15 year period. I have laddered CDs for about $330,000 that could take care of 10 years of the LMP, and I place the remaining $170,000 in an intermediate tip fund to access in the future at years 11 through 15. Even if interest rates go up, my tips fund should keep up with inflation since I will seek to access the money only after the 9 year duration rate.

Does that sound right?
Maybe one could gradually shift from the intermediate TIPS fund into a short term fund (TIPS or nominals) as the 11 year date gets closer?
That's a good thought. It addresses the problem of using the intermediate tips fund for my LMP if I didn't want to buy individual tips but also did not want to exit the tips fund for awhile. I'd still be guarding my LMP from the ravages of inflation. Thanks for the idea.
User avatar
bertilak
Posts: 10725
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Assets for Liability Matching Portfolio?

Post by bertilak »

Bustoff wrote:Is there any guidance on what assets and in what percentages to use for constructing a Liability Matching Portfolio?
I recently finished "Ages of the Investor" and Bernstein discusses three major LMP strategies: buying a TIPS ladder, deferring SS to age 70 and inflation adjusted fixed annuities. At the age of 60, I don't think I have the time or know how to construct a TIPS ladder, and Inflation adjusted SIPA's are too expensive. Would short-term bond funds and CD's be an appropriate substitute ?
Also, is here any allocation guidance available for constructing the risk side of a LMP?
The key to a bond ladder is holding the bonds to maturity. Then there is no risk of them losing value. At maturity you get the full value back. With TIPS that is an inflation adjusted value. Therefore, both the value and the income is safe. This risk-free nature is what makes them appropriate for matching the liability of required income (mortgage, food, insurance, etc.).

Short term (and therefore lower return) is not needed for safety when holding to term. As each bond matures you buy another to keep things rolling -- you did just get all your money back. Ideally you have enough income from this to fully match your fixed liabilities.

TIPS are ideal except that they have a lower return. There's always some annoying trade-off!

P.S. The above points mean that a bond fund is not as well suited to the LMP job.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
redhounds
Posts: 165
Joined: Thu Sep 20, 2012 10:43 am

Re: Assets for Liability Matching Portfolio?

Post by redhounds »

Bustoff wrote: Also, is here any allocation guidance available for constructing the risk side of a LMP?
I missed this part of the question earlier. If I'm understanding what I've read correctly, it would not be inappropriate for the risky portfolio to have strong tilts towards small value, both domestically and internationally. There isn't a need for bonds or cash in this portfolio as the LMP portfolio should already provide for whatever "basic" level of lifestyle that one has chosen (I'm hoping to build a LMP that gives a better than "basic" lifestyle). One version of the risky portfolio I've seen even recommended 100% small cap value (I think it was split between US SCV and International SCV, but I don't remember for sure). My current plan for the risk portfolio is to keep the same stock allocation that I currently have but with no bonds aside from the LMP. I'm still quite a few years away from completely implementing it, though, so ask me in 15 years and my answer could be different.

**EDITED TO ADD: For those who prefer the three fund portfolio, a reasonable risk portfolio would be a two fund portfolio consisting of Total Stock Market and Total International Market. Easy yet effective.
--Red
User avatar
joe8d
Posts: 4545
Joined: Tue Feb 20, 2007 7:27 pm
Location: Buffalo,NY

Re: Assets for Liability Matching Portfolio?

Post by joe8d »

staythecourse wrote:The basics of an asset to fill this purpose should be short (to keep up with increasing inflation or worst case unexpected inflation), be liquid, and be safe (low risk of default). CD's, high yield saving account, t-bills, TIPS ladder, and even short term bonds (less then 1-2 yrs. duration) should be fine.

Good luck.
+1. My LMP consists primarly of Online Savings, CD ladder,STIG Bond Fund, and EE,I,HH Bonds.May be adding some Short Term TIPS fund in future.
All the Best, | Joe
User avatar
bobcat2
Posts: 6076
Joined: Tue Feb 20, 2007 2:27 pm
Location: just barely Outside the Beltway

Re: Assets for Liability Matching Portfolio?

Post by bobcat2 »

Bustoff wrote.
Why are TIPS funds never mentioned as a substitute for a TIPS ladder in the context of a LMP ?
You can use TIPS funds in lieu of a TIPS ladder but doing so is tricky. You would need to invest in a combination of longer term and shorter term TIPS funds that are duration-matched to the targeted stream of your retirement income payouts in order to replicate, or at least nearly replicate, a TIPS ladder.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
User avatar
bobcat2
Posts: 6076
Joined: Tue Feb 20, 2007 2:27 pm
Location: just barely Outside the Beltway

Re: Assets for Liability Matching Portfolio?

Post by bobcat2 »

Bustoff wrote:Also, is there any allocation guidance available for constructing the risk side of a LMP?
Use the remaining assets in your portfolio before retirement, above the amounts dedicated to your conservative retirement income, to improve the estimated probability of achieving your aspirational income target. Investment risk should be measured in terms of uncertainty about income in retirement and not wealth. (The goal should not be wealth at retirement, but rather the price of a real annuity at your retirement age that provides you with your aspirational level of retirement income.) By setting this real income goal you are able to manage inflation and interest rate risks as well as asset price risks.

Investment risk is taken to the extent it is needed to reach your aspirational income target. As the portfolio income draws close to the goal, where taking risk is little needed, you gradually reduce your risk exposure. This dynamic strategy narrows the distribution of your possible retirement payouts, and thus reduces the estimated uncertainty about your retirement income.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Assets for Liability Matching Portfolio?

Post by Browser »

BobK wrote:
(The goal should not be wealth at retirement, but rather the price of a real annuity at your retirement age that provides you with your aspirational level of retirement income.) By setting this real income goal you are able to manage inflation and interest rate risks as well as asset price risks.
The problem I'm having with the whole liability-matching thing is the cost of a real annuity (inflation-adjusted annuity). Presently, these things are not a screaming bargain. Here's what Wade Pfau has to say about them in another thread:
I like inflation projection. But with fixed SPIAs offering 50-60% more initial payout than inflation-adjusted SPIAs, it's a tough decision. My reading of William Bernstein's new e-book Deep Risk suggests to me that there is merit to using less assets to buy the same initial income with a fixed SPIAs and investment some/most of the difference in stocks with the hope of getting inflation protection that way. Of course, this is riskier, but the underlying question is just how much someone should reasonably pay for guaranteed inflation protection.
Since real annuities seem to be the cornerstone of the liability-matching approach, this appears to be a real challenge. Presently, I think this approach is severely compromised by the fact that real annuities may provide inflation protection at too-high an initial cost for many retirees.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
bobcat2
Posts: 6076
Joined: Tue Feb 20, 2007 2:27 pm
Location: just barely Outside the Beltway

Re: Assets for Liability Matching Portfolio?

Post by bobcat2 »

Browser wrote:BobK wrote:
(The goal should not be wealth at retirement, but rather the price of a real annuity at your retirement age that provides you with your aspirational level of retirement income.) By setting this real income goal you are able to manage inflation and interest rate risks as well as asset price risks.
The problem I'm having with the whole liability-matching thing is the cost of a real annuity (inflation-adjusted annuity). Presently, these things are not a screaming bargain. Here's what Wade Pfau has to say about them in another thread:
I like inflation projection. But with fixed SPIAs offering 50-60% more initial payout than inflation-adjusted SPIAs, it's a tough decision. My reading of William Bernstein's new e-book Deep Risk suggests to me that there is merit to using less assets to buy the same initial income with a fixed SPIAs and investment some/most of the difference in stocks with the hope of getting inflation protection that way. Of course, this is riskier, but the underlying question is just how much someone should reasonably pay for guaranteed inflation protection.
Since real annuities seem to be the cornerstone of the liability-matching approach, this appears to be a real challenge. Presently, I think this approach is severely compromised by the fact that real annuities may provide inflation protection at too-high an initial cost for many retirees.
This needs to be made very clear. You are pricing your retirement income goals, both floor income and aspirational income, using the prices of real annuities at your retirement age. You are not necessarily purchasing a lot of real annuity income at retirement.

Much of your retirement income floor will consist of real annuity income from SS, particularly if you delay taking SS benefits. If you also have db pension income, your conservative income floor will probably be more than met with the combination of SS and db pension income. If you don't have a db pension, most of your income floor will be met with SS. Your floor can then be met by a relatively small real life annuity, or a TIPS ladder, or TIPS funds and I-bonds that duration match the income you would get from the ladder. You can also use these combinations of assets to fund additional safe income above the floor. The trade-off between TIPS and real annuities is higher payouts and longevity protection with annuities vs. more flexible income with TIPS, I-bonds, and funds. You could set your TIPS funding to something such as life expectancy and keep additional assets dry to purchase a cheaper real life annuity or annuities beyond life expectancy, if you should approach your life expectancy in good health.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Assets for Liability Matching Portfolio?

Post by YDNAL »

Bustoff wrote:Is there any guidance on what assets and in what percentages to use for constructing a Liability Matching Portfolio?
Not all liabilities are due this year, next year, or the year after.
  1. That said, Bernstein has suggested a "large hoard of cash" equal to 20 years of basic living expenses.
    http://www.bogleheads.org/forum/viewtop ... 0&t=120512
    wbern » Sun Jul 28, 2013 3:02 pm wrote:"Large hoard" =

    1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses
    2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years.

    Bill
  2. I don't agree because liabilities for year #20, #19, #18 certainly don't have to saved in a "large hoard of cash."
  3. I keep 2 years' worth of Short Bonds, Cash and equivalents. These monies are replenished through regular rebalancing. Other liabilities in Intermediate Bonds, etc.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
User avatar
bertilak
Posts: 10725
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Assets for Liability Matching Portfolio?

Post by bertilak »

Instead of using SPIAs how about the following plan:
  • Anticipate 5 years ahead how much extra will be needed to top off SS+pension to match desired income. Make or find your own inflation projection.
  • Buy a 5-year nominal bond to cover that.
  • Next year, do it again. Might need a little more or a little less because your inflation projection has changed. Also, the first bond will be kicking out a dividend. Year after that another inflation projection and even more dividends coming in, etc..
  • Use RMDs, when available, to provide (some of) the cash for that.
Variation: Buy 5-, 6-, 7-, 8-, 9-year bonds at the beginning.

From a traditional point of view this will help you establish a reasonable bond allocation.

I'm at the point where I might need to do that starting now, even before RMDs kick in.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
User avatar
convert949
Posts: 411
Joined: Thu May 07, 2009 8:33 am
Location: Fort Myers, FL

Re: Assets for Liability Matching Portfolio?

Post by convert949 »

Ran across this thread while "surfing" for info on LMP construction. One thought I had that is particular to my situation is the use of "non-investment" assets as a part of LMP planning. In particular, I own real estate other than my primary residence in the form of an income property and a second home. In my experience, while not as stable as bonds, real estate values do tend to follow inflation and therefore may be similar to a 0% coupon TIP or I Bond.

Ignoring the lack of liquidity for a moment, If one planned on selling in stages during different phases of their retirement, would this be a legitimate asset to consider as a part of establishing an LMP floor in addition to Fixed Income, SS, SPIA's, etc?

To clarify, I am not trying to construct a formal "ladder" so the timing of the sale of these assets would be flexible. I am, however, trying to establish a baseline for what an appropriate "risk portfolio" might be for my particular situation.

Thanks in advance for your help and advice...

Best to all,

Bob
User avatar
bertilak
Posts: 10725
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Assets for Liability Matching Portfolio?

Post by bertilak »

convert949 wrote:Ran across this thread while "surfing" for info on LMP construction. One thought I had that is particular to my situation is the use of "non-investment" assets as a part of LMP planning. In particular, I own real estate other than my primary residence in the form of an income property and a second home. In my experience, while not as stable as bonds, real estate values do tend to follow inflation and therefore may be similar to a 0% coupon TIP or I Bond.

Ignoring the lack of liquidity for a moment, If one planned on selling in stages during different phases of their retirement, would this be a legitimate asset to consider as a part of establishing an LMP floor in addition to Fixed Income, SS, SPIA's, etc?

To clarify, I am not trying to construct a formal "ladder" so the timing of the sale of these assets would be flexible. I am, however, trying to establish a baseline for what an appropriate "risk portfolio" might be for my particular situation.

Thanks in advance for your help and advice...

Best to all,

Bob
The key to a liability matching portfolio is matching income with expenses: cash flows. The expenses (outgoing cash flow) are the liabilities to be matched. "Matching" implies reliable income as the expenses that are most important are the ones that are not very flexible. So it is not wise to ignore liquidity, even for the moment. :happy Non-traditional, illiquid, investments are not very good at providing reliable cash flow.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
User avatar
convert949
Posts: 411
Joined: Thu May 07, 2009 8:33 am
Location: Fort Myers, FL

Re: Assets for Liability Matching Portfolio?

Post by convert949 »

bertilak wrote:
convert949 wrote: To clarify, I am not trying to construct a formal "ladder" so the timing of the sale of these assets would be flexible. I am, however, trying to establish a baseline for what an appropriate "risk portfolio" might be for my particular situation.

Thanks in advance for your help and advice...

Best to all,

Bob
The key to a liability matching portfolio is matching income with expenses: cash flows. The expenses (outgoing cash flow) are the liabilities to be matched. "Matching" implies reliable income as the expenses that are most important are the ones that are not very flexible. So it is not wise to ignore liquidity, even for the moment. :happy Non-traditional, illiquid, investments are not very good at providing reliable cash flow.
Bertilak, I agree that it is unwise to ignore liquidity of real estate and other significant assets... I just wonder if it makes any sense, given adequate liquidity in other investments to consider these assets as a part of the total available as "safe" investments. I have established "cash flows" adequate to support my "basic" needs through Dividends, SS and SPIA's. I will need to dip into the principle and capital gains to support certain activities at this time such as the second home, travel, etc. I expect that the financial need created by these activities will decrease as I age... and as these assets are sold and the proceeds returned to my investment portfolio. The question remains, are these "safe assets" or "risk assets"...

Perhaps an LMP is a misnomer. Currently, I have 5 years excess expenses in cash and short term bonds and another 10 -15 years in intermediate term bonds including I Bonds. I considered this a fund based matching approach. Coincidently, these salable assets represent another 10-15 years of excess expenses over and above the liquid investments. Of course, the risk portfolio (equities) is available during good times and can be drawn upon to rebalance from time to time.

Thanks for your input...

Best to all,

Bob
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Assets for Liability Matching Portfolio?

Post by dbr »

A "risk" portfolio in this context can contain any balance of risky and less risky assets that the investor chooses. There are major semantic issues going on when starting a discussion around the liability matching portfolio concept.
User avatar
convert949
Posts: 411
Joined: Thu May 07, 2009 8:33 am
Location: Fort Myers, FL

Re: Assets for Liability Matching Portfolio?

Post by convert949 »

dbr wrote:A "risk" portfolio in this context can contain any balance of risky and less risky assets that the investor chooses. There are major semantic issues going on when starting a discussion around the liability matching portfolio concept.
Indeed... Originally, I had considered these other non-investment assets "plan B", assets that could be sold when necessary or when they are no longer desired. If I ignore them and plan for 25-30 years of "safe" assets as Dr. Bernstein recommends, my "risk" portfolio is is obviously less than if I include them as the total dollars involved is more than 20% of net worth. My goal is to establish a maximum that I can risk. Not saying if I would risk it all...

The origin of my thoughts began with his comments earlier about taking enough to live on "off the table". My ultimate goal is to put the need for equities and other risk assets far enough away that once settled, I can sleep at night and know that I will not make bad decisions during bad times.

As mentioned, perhaps this is an issue separate from constructing an LMP.

Best,

Bob
User avatar
bertilak
Posts: 10725
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Assets for Liability Matching Portfolio?

Post by bertilak »

convert949 wrote:Perhaps an LMP is a misnomer. Currently, I have 5 years excess expenses in cash and short term bonds and another 10 -15 years in intermediate term bonds including I Bonds. I considered this a fund based matching approach. Coincidently, these salable assets represent another 10-15 years of excess expenses over and above the liquid investments. Of course, the risk portfolio (equities) is available during good times and can be drawn upon to rebalance from time to time.
If you have a large enough portfolio then liability matching is not necessary. Liability matching is for those of us who need to plan ahead to be sure we can maintain our desired lifestyle. We only get one ride around the merry-go-round. We can't let it all depend on getting that brass ring the first (and only) time. We need some guarantees, something to keep us out of the kibble vs. canned discussions. If you already have the brass ring, no problem!

A more positive point of view is to think of liability matching as a way to know how much you can afford to put into your risky portfolio -- after coverage of basic needs are addressed. Even with a large portfolio this can ensure you don't risk too much and stumble. Kinda like putting Plan B into effect first and then going to work on Plan A. With Plan B already doing its job you now have lots of freedom of choice for Plan A.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
User avatar
convert949
Posts: 411
Joined: Thu May 07, 2009 8:33 am
Location: Fort Myers, FL

Re: Assets for Liability Matching Portfolio?

Post by convert949 »

bertilak wrote: A more positive point of view is to think of liability matching as a way to know how much you can afford to put into your risky portfolio -- after coverage of basic needs are addressed. Even with a large portfolio this can ensure you don't risk too much and stumble. Kinda like putting Plan B into effect first and then going to work on Plan A. With Plan B already doing its job you now have lots of freedom of choice for Plan A.
Thanks, bertilak... I think that you have identified (and helped me understand) just what I hoped to accomplish with this exercise. I was drawn to the thread by the OP who wondered what assets were appropriate to include in an LMP. In reality, you put it well as I am really interested in establishing a plan for withdrawal (I turned 65 this year) that 1, assures me that I have enough safe investments to weather the tough times and 2, gives me guidance as to an appropriate amount to devote to the "risk" portion of our assets.

Now, once the need has been identified, (Plan B), the desire to take risk becomes the last step in the process. Obviously, that is a very personal decision...

Thanks for the help!

Best,

Bob
Post Reply