The world’s most sophisticated institutions invest using asset/liability matching strategies to help them properly navigate their liquidity needs over time. Banks, pensions and other large institutions don’t rely on vague “risk profiling” processes or Modern Portfolio Theory and instead use practical asset/liability matching strategies. Retail investors, on the other hand, are sold a narrative about earning high returns in “risk optimized” portfolios in exchange for the guarantee of high fees. We’re here to change that by giving retail investors and advisors an accessible way to implement asset/liability matching strategies and invest like the biggest and most sophisticated asset managers in the world. 

Time is the most valuable asset we all have. And navigating time is the essential component of any good financial plan. But the financial services industry does a terrible job of communicating time horizons to investors. Traditional portfolio managers charge high fees while trying to pick the optimal set of assets per unit of risk without giving investors any understanding of how their portfolios match certain time horizons. This old model is broken as the evidence shows over 80% of active managers underperform the market year in and year out. You’ve probably experienced this process before where an advisor or portfolio process starts with a vague “risk profiling” process and then matches you to an “efficient” portfolio of stocks and bonds. You most likely end up with a diversified portfolio, but one that doesn’t give you any understanding of how its specific components match your financial needs. The Defined Duration strategy solves this problem by quantifying the element of time in a financial plan and corresponding asset allocation.

This innovative approach to asset allocation helps improve the probability of meeting your financial goals by helping you better understand your expenses and liabilities and the way specific assets align with those expenses and liabilities. This not only establishes a financial planning based foundation, but it applies a behaviorally robust solution to the problems that exist in Modern Portfolio Theory.

Planning Based
Fully Customizable
Low Fee and Tax Efficient
All Weather
Behaviorally Robust

Traditional portfolio construction uses what’s called “mean variance optimization” or Modern Portfolio Theory. This means the portfolio manager plugs in a certain risk profile and then spits out an “efficient” asset allocation such as a 60/40 stock/bond portfolio. This approach is usually sold to investors as generating the optimal return per unit of risk in exchange for high fees. But this process is backwards and fails to provide the investor with an understanding of how much risk they’re taking per unit of return across time. This is because the portfolio manager or advisor is trying to optimize the collection of assets without any understanding of the customer’s specific liabilities.

The Defined Duration strategy flips this entire process around and starts by first quantifying the investor’s expenses/liabilities. We then apply the proper assets based on liability needs, not based on asset performance wants. This financial planning based foundation gives the investor a better understanding of how much money they’ll have at certain times in their life thereby creating a diversified and behaviorally robust asset allocation.

The purpose of the Defined Duration strategy is to customize a portfolio to the many time horizons over which an investor lives. The actual Defined Duration portfolios are constructed to have many time horizons, but as a general overview the Defined Duration portfolio can be understood as three buckets that have many time horizons within each of the buckets:

  1. Stability Bucket
  2. Growth Bucket
  3. Insurance Bucket

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

The stability bucket is comprised of instruments that are designed to give you short-term principal stability and income to help you meet short-term and medium-term liability needs. This could include money market funds, Treasury Bills and short-term bond ETFs and will comprise 10-30% of the portfolio depending on planning needs over multiple short time horizons (0-3 years).

The growth bucket is comprised of diversified stock ETFs, REITs, corporate bond ETFs and multi-asset ETFs. This is the core of the portfolio and will be implemented in a tax efficient and diversified manner comprising 30-60% of the portfolio. This will include medium-term and long-term instruments structured over 5-20 year time horizons.

The insurance bucket is dynamic and changes across time to meet your portfolio’s insurance needs. The insurance bucket is optional and contingent on your financial plan. It’s best utilized in specific high risk environments and for investors who need it as part of their broader financial plan. In most environments cash/T-Bills are a good insurance hedge that gives you optionality and certainty. But for the right investor and in unusual environments the insurance bucket 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. It will fluctuate from 0-15% of the portfolio depending on personal needs and macroeconomic conditions.

If you want your own customized Defined Duration portfolio you can contact us here. We’ll customize your financial plan and then assign the corresponding assets to that plan. If you want to manage it on your own then great. Don’t hesitate to reach out and ask for help. But if you prefer for us to manage it on your behalf then we will rebalance the portfolio, tax loss harvest, optimize cash holdings and help you navigate the twists and turns of the markets over your ever-changing financial life.

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