Defined Duration Investing FAQ

Defined Duration Investing is a holistic financial planning based strategy that’s designed to weather all environments across specific time horizons and help you stay the course. We've constructed a model that applies a specific time horizon to asset classes and strategies. After assessing your financial liabilities across specific time horizons we're then able to apply the proper assets to match those liabilities. This results in a portfolio that is not only diversified across asset classes, but more importantly, it's diversified across time. This is crucial in the process of meeting your financial goals so you can construct an asset allocation where you have greater certainty about the quantities of assets you'll have at specific times in the future. Additionally, this framework constructs a proper behavioral perspective of certain assets to help you generate better returns by behaving better.

Most asset allocation strategies use a mean variance optimization approach to portfolio construction. This means that the advisor or manager is designing an overall portfolio that is designed to optimize returns per unit of risk. The Defined Duration approach adds the element of time to the portfolio to help an investor segment their portfolio in specific blocks in order to optimize returns per unit of risk across specific time horizons. This helps the investor maintain a diversified portfolio that is consistent with their financial planning needs across time.
The Defined Duration portfolio is a highly diversified portfolio of global stocks, bonds, commodities, gold, cash and other assets. We run a full financial plan to quantify your liabilities across specific time horizons. We then match those liabilities to specific assets in a customized portfolio. This provides you with a highly diversified "all weather" style portfolio that gives you greater certainty about your assets across specific time horizons while helping you behave better.

As a general framework the Defined Duration strategy can be thought of as existing on a bell curve with three specific buckets:

1) Nominal stability bucket

2) Growth bucket

3) Insurance bucket

The specific portfolio will be implemented using low cost and tax efficient bonds and ETFs.

The nominal stability bucket is comprised of instruments that are designed to give you short-term principal stability and income. This could include money market funds, Treasury Bills and bond ETFs.

The growth bucket is comprised of diversified stock ETFs, REITs, corporate bond ETFs and multi-asset ETFs.

The insurance bucket is dynamic and changes across time to meet your insurance needs. This could include gold, options, commodities and other instruments that have low expected real returns and high potential asymmetric payoffs to help protect you from inflation and other uncertainties.
Traditional bucketing strategies are excellent in terms of their simplicity and low costs. However, they can be too simple and are traditionally implemented with just two or three buckets and typically two assets classes (stocks and bonds). We are big advocates of the idea that simple is better, but a two or three bucket strategy is too simple in many cases. We prefer a broader and more diversified allocation that diversifies across more specific asset classes AND more specific time horizons.

The Defined Duration strategy is what we refer to as a "time blocking" asset allocation. Time blocking is a well known productivity strategy and our Defined Duration helps us block time in a portfolio to help improve the productivity of the specific assets. We achieve this using our Defined Duration model which helps us quantify the duration of specific assets and matches them to specific liabilities. This quantified approach allows us to better match assets with liabilities to customize the portfolio using as many time blocks as necessary and results in a methodology that is closer to pension style asset liability matching approaches. As a result we aren't limited to one, two or three buckets because we construct the time blocks to meet as many time horizons as you need.

Further, the Defined Duration strategy is constructed to optimize cash holdings and insurance. This maintains the simplicity of traditional bucketing strategies, but adds a layer of insurance and income that can help investors better navigate the ups and downs of the market cycle.
Insurance is a prudent part of any financial planning process and we believe that your portfolio needs to be insured from things like recessions, inflation and other outlier events that can disrupt your financial life. We typically use a 0-15% slice of the portfolio to hedge against these risks during unusual periods in the business cycle. In extreme environments this could include alternatives like gold, managed futures or options. But in most environments cash is a perfectly sufficient insurance allocation.

We view the insurance bucket in much the same way that someone might view term life insurance. There are specific periods in someone's life where term insurance is prudent to cover a specific period of unusual risk. We integrate the insurance bucket in a similar manner where insurance is added to portfolios during specific parts of the business cycle. We hope the insurance is never needed, but also know it's better to have it and not need it than to need it and not have it.

Interestingly, the super long duration instruments in the Defined Duration model are all long duration instruments such as commodities, gold, options and long-term bonds. These instruments all operate like insurance over the long-term in that they don't always generate consistent nominal returns, but often provide very high asymmetric returns during unusual financial conditions.
No! The beauty of the Defined Duration strategy is that it's entirely customizable and personalized to the investor's needs. We start with a financial planning foundation and in certain environments and for certain investors, insurance is a prudent part of their financial plan.

We also know that some people do not like gold, commodities or tail risk hedges. And that's fine. We believe that stocks/bonds are the core of any good portfolio construction process and we often use cash and cash equivalents as behavioral insurance for investors who prefer not to use "alternative" investments like gold, commodities and tail risk hedges.
This can vary greatly depending on how the customized portfolio is constructed for you. But in general, we don't believe in the Wall Street mantra of trying to beat the market and get rich quick concepts.

The investment management business has mastered the art of selling high fees in exchange for the hope of high returns. But unfortunately, high fees in no way guarantee high performance. And ultimately, this financial model can lead to a portfolio manager taking additional risk to try to “beat the market.” This creates behavioral risk for the shareholders since they may be subject to big swings in their savings due to this increased risk.

We believe investors deserve a more honest approach to performance. Most investors shouldn't try to beat the market and probably have no need to. Instead, they should focus on reallocating their savings in a manner that is aligned with their personal financial goals and behavioral constraints. This means investing in the appropriate portfolio rather than the illusory perfect market-beating portfolio.

The Countercyclical Indexing and Defined Duration strategies are not "beat the market" strategies. They are strategies that are specifically structured to align with your financial goals and help you behave better. This will not only increase the odds of achieving your financial goals, but it will also help you sleep better and focus on the things that are most important in life.
The Defined Duration strategy can be highly customized to specific income and diversification needs. The Defined Duration Income strategy uses the same general asset-liability matching framework that the Defined Duration strategy uses, however, it is constructed specifically around income generating instruments to help you maximize income. We know from the white paper that one of the primary ways to reduce duration is through income generation. This strategy is specifically geared towards income to help you increase your short-term income and certainty so you can have greater confidence in your financial plan.