A recent article the Journal of Portfolio Management argues that asset liability management is highly relevant and applicable to the field of personal finance, while traditional methods such as mean-variance optimization are not appropriate for private investors.
Asset-liability management is a portfolio management technique that attempts to match the nature of duration of the assets and liabilities in the portfolio. For example, defined benefit pension fund managers or insurance company portfolio managers have future liabilities or obligations that must be met by the resources (assets) in the portfolio. The liabilities may involve future pension payments or insurance claims.
These professional investors are put in a difficult position if they have a portfolio full of twenty year bonds that is supposed to support insurance claims due in one year.
One can see how personal finance and retirement income planning in particular have some similarities. Retirees have various types of obligations that “come due” throughout the course of their retirement, so they need to think about structuring their assets in a way that reflects of “matches” this liability structure.
Source: Journal of Portfolio Management
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