Building Portfolios for Households with Multiple Investment Goals

Laurence Articles

This is the second article in a series that aims to enhance the methodology by which financial planning is conceptualized and implemented. In the first article in this series, “Using Economic Balance Sheets for Financial Planning,” we showed that financial planners need to have balance sheet (“stock”) information, not just income and expense (“flow”) information, about households in order to help them identify their liabilities and allocate their assets.

Here, we present an approach for mapping the liabilities on the balance sheet into investment objectives and matching portfolio holdings to those objectives, as best as can be done given existing market realities.

The conventional solutions, broadly diversified portfolios of individual assets and/or packaged products such as ETFs and mutual funds, aren’t working as well as they could be. The reason is the added requirement of funding a schedule of liabilities, or equivalently, funding a household’s goals. If the liability were a risk-free cash flow that occurs once, there would be no difference; the conventional solutions would be the correct ones. But, in real life, the liability is multi-period and not fully predictable.

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