Dedicated Portfolio Theory, in finance, deals with the characteristics and features of a portfolio built to generate a predictable stream of future cash inflows. This is achieved by purchasing bonds and/or other fixed income securities (such as Certificates of Deposit) that can and usually are held to maturity to generate this predictable stream from the coupon interest and/or the repayment of the face value of each bond when it matures. The goal is for the stream of cash inflows to exactly match the timing (and dollars) of a predictable stream of cash outflows due to future liabilities. For this reason it is sometimes called cash matching, or liability-driven investing.
The most recent book on the topic by Huxley and Burns, based on a research project at the University of San Francisco was published in the late 1990s and a book titled Asset Dedication was published in 2005 described how the advances in desktop computers reduced the cost of constructing dedicated portfolios to levels where individual investors could use the concept for personal investing, such as the example below shows for a retirement portfolio. Read More…
Liability-Driven Investing (LDI) is a popular strategy with pension funds looking to match a stream of payments to retirees, and retirees face the same inflow-outflow problem that pension fund managers face. Income matching is the most appropriate approach to LDI for individual investors because it mitigates, manages, or eliminates many of the risks associated with retirement income. Download Now…
Baby boomers continue to impact our nation. The generation that fought for free speech and civil rights is now forcing financial services to re-evaluate investing and retirement planning. They are the first group to transition from traditional pensions to the 401(k). Boomers will increasingly have to look to their own accounts to support them in retirement. Essentially, they have to treat their 401(k) and IRA accounts as their personal pension. Read More…
With a few alarmists calling for a massive increase in municipal bond defaults and many investors still stinging from the Lehman Bros. bond defaults, should investors be worrying about their bonds? High quality municipal and corporate bonds have long been considered “safe” asset classes. Volatility in the stock market is enough to keep many investors up at night and now many may be losing sleep over their bonds too. This paper takes an historical look at the risks and relative safety of high quality municipal and corporate bonds. We will show that although investors need to carefully analyze their bond investments, they can still rely on high rated investment grade bonds to deliver predictable income and relative stability in their portfolios. Download Now…
Today’s interest rate environment presents financial advisors with a conundrum – do I stay on the sidelines and wait for rates to rise before re-allocating my clients’ portfolios, or do I jump in now….what are the costs of waiting for rates to rise? We evaluate this question in the context of income-matching portfolios constructed with individual bonds. Income-matching portfolios consist of a series of individual bonds held to maturity whose redemptions and coupon payments provide cash flows that precisely match a client’s target income stream. We will compare the income-matching strategy to investing in short duration bond funds, holding cash or buying a CD to show it is better for investors to buy now than wait for rates to rise. Download Now…
Dedicated Portfolio Theory, in finance, deals with the characteristics and features of a portfolio built to generate a predictable stream of future cash inflows. This is achieved by purchasing bonds and/or other fixed income securities (such as Certificates of Deposit) that can and usually are held to maturity to generate this predictable stream from the coupon interest and/or the repayment of the face value of each bond when it matures. The goal is for the stream of cash inflows to exactly match the timing (and dollars) of a predictable stream of cash outflows due to future liabilities. For this reason it is sometimes called cash matching, or liability-driven investing.