Asset Dedication

About the Authors
Stephen J. Huxley, Ph.D. Economics, and J. Brent Burns, MBA Finance are founding partners of Asset Dedication, L.L.C. Dr. Huxley, a registered investment adviser, is a professor of decision sciences at the University of San Francisco.

Table of Contents
PART I  Asset Dedication - The Next Step in Asset Allocation
 * Chapter 1 Asset Allocation: The Dominant but Procrustean Paradigm
 * Chapter 2 Asset Allocation: The Gaps
 * Chapter 3 Asset Dedication- How It Works
 * Chapter 4 Asset Dedication vs. Asset Allocation: Historical Comparison from 1926

PART II  Dedicating Assets Before and After Retirement
 * Chapter 5 Calculating Your Financial Independence
 * Chapter 6 Finding Your Critical Path
 * Chapter 7 The Distribution Phase: Dedicating Assets to Do Their Job
 * Chapter 8 Building An Asset Dedicated Portfolio: Doing It Yourself on the Internet
 * Chapter 9 Using Asset Dedication for More than Steady Retirement Income

PART III Theoretical Underpinnings of Asset Dedication: A Few Fundamentals
 * Chapter 10 Life, Death, Economics and Time
 * Chapter 11 A Few Investment Fundamentals
 * Chapter 12 Understanding the Numbers
 * Chapter 13 Portfolio Management Tools
 * Chapter 14 Forecasting: The Good, The Bad and The Ugly
 * Appendices Historical Data

Reader Review
Don't let Huxley and Burns' use of the fancy Asset Dedication terminology confuse you. This book presents another version of the "multiple buckets of money" strategy for managing retirement savings both before and during retirement. What distinguishes this "buckets" book from many written by financial planners is the academic depth of analysis. This academic depth is not surprising given their training: Stephen Huxley has a PhD in Economics while Brent Burns has an M.B.A. in Finance. Huxley and Burns aren't Bogleheads, but their book is nevertheless well written and was a stimulating read.

Huxley and Burns argue in this book that the typical "fixed allocation portfolio" (e.g. a 40% equities and 60% bonds + cash portfolio) might make life easy for the investment advisor, but does not best meet the individualized needs of the investor. Rather, they argue that the appropriate portfolio allocation should be calculated by starting from a more fundamental parameter: how many years of assured income the retiree desires to "dedicate" to cash and laddered bonds. This decision, typically somewhere between 3 to 10 years of spending, when combined with the investor’s total portfolio size, then determines the percentage of equities and bonds + cash appropriate for that individual. As the bonds + cash portion of the portfolio is spent down, the investor actively and strategically decides when it is appropriate to sell equities to reload this living expense portion of the portfolio. This could be done every year, but could be delayed for many years during a bear market.

Starting from this portfolio construction philosophy, Huxley and Burns compare their Asset Dedication portfolio approach to traditional fixed percentage portfolios over the time range 1926 – 2002. They present very detailed comparisons showing how their approach can increase total returns, reduce the influence of short term stock market volatility and reduce Sequence Risk (the risk that a bear market early in retirement will lead to a prematurely depleted equity portfolio and an untimely portfolio crash).

Another useful aspect of retirement portfolio planning that Huxley and Burns discuss is the personalized critical path. This is a calculation that shows the minimum yearly portfolio size (both pre- and post-retirement) based on the assumed equity, bond and cash returns as well as the average anticipated living expenses, taxes and inflation. By making a plot of the calculated critical path as well as the real portfolio path, the investor can quickly see how she is progressing towards / maintaining a financially secure retirement. As long as the actual portfolio lies above the critical path in the plot, the investor is "safe", i.e. making good progress towards their retirement goals. If the actual portfolio begins to trend below the critical path, then the investor knows that steps must be taken to reduce living expenses (preferred) and/or increase portfolio returns (which unfortunately requires taking more risks with the investments). The critical path plot is a simple way to visualize the results of various "what-if" scenarios. This reviewer has been using such a critical path plot for several years since reading this book, and has found it to be a very useful tool.

During the retirement years Huxley and Burns recommend the use of a laddered series of investment grade bonds rather than a bond mutual fund for creating a reliable stream of income. This is because the value of bond funds can drop due to rising interest rates, while bonds themselves will tend towards par value as they approach maturity. They briefly discuss the advantages of using a software program to construct an efficient bond ladder. They do not spend a lot of time explaining how to safely select and purchase individual bonds. If bonds other than U.S. Treasuries are to be utilized in the investment portfolio, the reader is warned that a lot of additional learning would be required to intelligently make the selections.

The last third of the book is a review of some basic principles of economics, stocks, bonds and investment portfolios aimed at helping a novice better understand the ideas underlying the initial two thirds of the book. This final third should either be read first, or more preferably the reader should already be familiar with this material.

There is a lot to like about this book, not the least of which is the depth of discussion and the large amounts of historical market performance data they analyze. It is not aimed at beginners, so make sure you have some background in investing and retirement planning before delving into it. But if you want to explore "buckets of money" approaches to handling your investments during retirement, you are certain to gain some new insights from this book.

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