What is the name for this type of portfolio?

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BigEater
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What is the name for this type of portfolio?

Post by BigEater » Mon Oct 22, 2018 1:47 pm

What is the official name for the relatively new type of portfolio for institutions and retirees that aims at producing a specific amount of moneyu each year (rather than growing assets by a certain percentage).
What makes it different from MPTs is that the portfolio is constructed with equities and actual bonds (not bond funds). The bonds provide the income, and the equities are held for growth and to purchase new bonds as the older ones mature.
If I recall correctly, bonds rather than bond funds are used because you know when you buy a bond exactly how much it will yield and for how long.
Every year the investor looks at how much income the bonds will produce for the upcoming year and sells equities if needed to buy new bonds but there are scenarios in which equities aren't sold because of declining values.

The only other information I can provide is that they're called by one name in the UK and another in the US.
Anyone?

asset_chaos
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Re: What is the name for this type of portfolio?

Post by asset_chaos » Mon Oct 22, 2018 4:50 pm

Sounds like a type of liability matching portfolio.
Regards, | | Guy

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linenfort
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Re: What is the name for this type of portfolio?

Post by linenfort » Tue Oct 23, 2018 4:07 pm

Probably too obvious to be the right answer, but Growth & Income?
bogleheads, don't knock state lotteries. They helped defund the mafia.

BigEater
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It's also called "Dedicated Portfolio Theory" or LDI

Post by BigEater » Tue Oct 23, 2018 6:31 pm

Thanks for the quick and accurate answer—using your terms I was able to search and find out that in the US it's also called Dedicated Portfolio Theory and in England it's Liability Driven Portfolio.

After reading a little more about it, it sounds like some experts endorse it while others feel that it is dangerous because we're bad at predicting how much money we need in retirement plus there's the risk of horrendous medical bills decimating your entire portfolio.

asset_chaos
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Re: It's also called "Dedicated Portfolio Theory" or LDI

Post by asset_chaos » Tue Oct 23, 2018 8:35 pm

BigEater wrote:
Tue Oct 23, 2018 6:31 pm
After reading a little more about it, it sounds like some experts endorse it while others feel that it is dangerous because we're bad at predicting how much money we need in retirement plus there's the risk of horrendous medical bills decimating your entire portfolio.
I think liability matching was designed for things like pension plans that can make an actuarially accurate estimate of how much money they will have to pay out each year. As you've noted, any individual risks much more variability in their estimation of future expenses. Of course, you could design a liability matched portfolio targeting a minimum income floor for retirement. Look up the posts of a boglehead named bobcat2 who has posted a lot about that and liability matching in general.
Regards, | | Guy

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