PROCESS AND STRUCTURE

How Asset Life Matching Works

How Asset Life Matching Works

Asset Life Matching turns a financial plan into a portfolio structure by connecting future obligations to assets with appropriate characteristics.

Asset Life Matching turns a financial plan into a portfolio structure by connecting future obligations to assets with appropriate characteristics.

The process begins with the life the money must support. Before deciding how an asset should be invested, Asset Life Matching asks what future obligation that asset may need to fund, how important that obligation is, and how much flexibility exists if markets or life circumstances change.

The process begins with the life the money must support. Before deciding how an asset should be invested, Asset Life Matching asks what future obligation that asset may need to fund, how important that obligation is, and how much flexibility exists if markets or life circumstances change.

The five-step process

The five-step process

01

Identify

Define future spending, goals, and obligations.

02

Evaluate

Assess timing, certainty, flexibility, inflation sensitivity, and consequence.

03

Assess Capacity

Determine how much risk the financial structure can withstand and how much return is actually required.

04

Match

Select assets whose characteristics align with the obligation.

05

Monitor

Review and revise the matches as markets, priorities, and life circumstances change.

The financial plan determines the portfolio structure—not the other way around.

The financial plan determines the portfolio structure—not the other way around.

Step 1: Identify future liabilities

Step 1: Identify future liabilities

A liability is not only a debt. In Asset Life Matching, a liability is any future use of money the portfolio may need to support. That may include spending, taxes, retirement income, education, housing, healthcare, charitable commitments, family support, or legacy goals.

A liability is not only a debt. In Asset Life Matching, a liability is any future use of money the portfolio may need to support. That may include spending, taxes, retirement income, education, housing, healthcare, charitable commitments, family support, or legacy goals.

Emergency reserves

Annual spending

Retirement withdrawals

College tuition

Home purchase

Healthcare

Charitable giving

Legacy

Step 2: Evaluate the character of each obligation

Step 2: Evaluate the character of each obligation

A future obligation is not just a date. It has a character. The same dollar amount due in the same year can require a different investment approach depending on how certain, flexible, inflation-sensitive, and consequential the obligation is.

A future obligation is not just a date. It has a character. The same dollar amount due in the same year can require a different investment approach depending on how certain, flexible, inflation-sensitive, and consequential the obligation is.

Timing

When may the money be needed?

Certainty

How likely is the obligation to occur?

Flexibility

Can the amount or timing change?

Inflation sensitivity

How might the cost rise over time?

Consequence

What happens if the money is unavailable?

Step 3: Assess financial risk capacity

Step 3: Assess financial risk capacity

Traditional risk questionnaires often focus on how an investor feels about market volatility. That matters, but it is not enough. Asset Life Matching also asks how much financial stress the plan can withstand. A household with strong cash flow, flexible spending, and long time horizons may have more risk capacity than a household facing fixed near-term obligations.

Traditional risk questionnaires often focus on how an investor feels about market volatility. That matters, but it is not enough. Asset Life Matching also asks how much financial stress the plan can withstand. A household with strong cash flow, flexible spending, and long time horizons may have more risk capacity than a household facing fixed near-term obligations.

Risk tolerance

Emotional Personal Behavioral How volatility feels

Risk capacity

Structural Planning-based Financial What the plan can withstand

Step 4: Match asset characteristics to liability characteristics

Step 4: Match asset characteristics to liability characteristics

Once the obligation is understood, the asset can be selected in relation to the job it must perform. Near-term, essential, and inflexible obligations generally require greater stability and liquidity. Longer-term or more flexible obligations may allow for assets with greater volatility, higher expected return, and more inflation protection.

Once the obligation is understood, the asset can be selected in relation to the job it must perform. Near-term, essential, and inflexible obligations generally require greater stability and liquidity. Longer-term or more flexible obligations may allow for assets with greater volatility, higher expected return, and more inflation protection.

Emergency reserve

Liability character:

Immediate, uncertain, low flexibility, high consequence

Possible asset characteristics:

Liquidity and stability

Home purchase in six years

Liability character:

Intermediate timing, moderate certainty, moderate flexibility

Possible asset characteristics:

Defined maturity and resilience

Legacy assets

Liability character:

Long-term, flexible, inflation-sensitive

Possible asset characteristics:

Long-term growth and inflation protection

How long does an asset need to do its job?

How long does an asset need to do its job?

Some assets have obvious timing characteristics. Cash is available immediately. A bond or bond ladder can be structured around known future dates. Riskier assets are different. Stocks may be appropriate for long-term obligations, but not because they are safe in any given year. They may be appropriate because the obligation has enough time and flexibility to allow for market declines and recovery. In that sense, every asset has an implied planning duration: the amount of time it may reasonably need to fulfill its role.

Some assets have obvious timing characteristics. Cash is available immediately. A bond or bond ladder can be structured around known future dates. Riskier assets are different. Stocks may be appropriate for long-term obligations, but not because they are safe in any given year. They may be appropriate because the obligation has enough time and flexibility to allow for market declines and recovery. In that sense, every asset has an implied planning duration: the amount of time it may reasonably need to fulfill its role.

Riskier assets are not matched to long-term obligations because they are safe. They are matched because the obligation may have enough time, flexibility, and risk capacity to absorb volatility and recovery.

Riskier assets are not matched to long-term obligations because they are safe. They are matched because the obligation may have enough time, flexibility, and risk capacity to absorb volatility and recovery.

Matching is not only about expected return. It is also about whether the asset has enough time to recover from the risks it takes.

Matching is not only about expected return. It is also about whether the asset has enough time to recover from the risks it takes.

Step 5: Monitor and revise

Step 5: Monitor and revise

Asset Life Matching is not a one-time exercise. Liabilities approach. Markets change. Life evolves. The structure should be reviewed as spending needs become nearer, goals change, or the household’s financial capacity changes.

Asset Life Matching is not a one-time exercise. Liabilities approach. Markets change. Life evolves. The structure should be reviewed as spending needs become nearer, goals change, or the household’s financial capacity changes.

Liabilities approach

Markets change

Life evolves

A living structure for real financial lives

A living structure for real financial lives

The goal is not to predict the future perfectly. The goal is to create a structure that can adapt while keeping assets connected to the lives they are meant to support.

The goal is not to predict the future perfectly. The goal is to create a structure that can adapt while keeping assets connected to the lives they are meant to support.

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