Anybody actually implement an LMP (Liability Matching Portfolio)?

[Midpack]

I read the most recent book(s) and while the idea makes a lot of sense, at least protecting some assets with an LMP and an Risk Portfolio (so not out of the market by any means), none of the suggested financial vehicles seem to make any sense now. I'd love to protect more of our assets, in conservative investments that at least have a chance of keeping up with inflation. But annuities, TIPS, CDs, Treasuries, etc. - even Dr. Bernstein doesn't seem to recommend an LMP right now?

After advocating investing approaches that eschew timing, we're supposed to include timing in getting into an LMP?

I have somewhat of an "underfunded" LMP, Soc Sec & bond funds but...

What am I missing?

I wrote "Ages of the Investor" as a way to think about the retirement investing process, not as a normative prescription. Bobcat's posts on the subject, and the links he provides, are also quite helpful.

In a perfect world, the TIPS yield curve is positive at all maturites, which are available at least every few years all the way out to, oh, age 110 or so.

But we don't live in that world right now: below 6 years, rates are negative, which means you have to pay >$1.00 to consume $1.00 0-6 years hence. And even if rates rise, there's a gaping maturity hole between 2032 and 2040. Finally there are no maturities beyond 2043. And so forth.

In a perfect world, an inflation-adjusted annuity will never default. There have been no major ones in the past, but you could also have said the same thing about major terrorist events on U.S. soil before 9/11/01, and if the GFC wasn't a wake-up on that one, you're not conscious.

So there are leaps of faith that have to be made; I can't tell you when or whether to buy inflation-protected annuities or a TIPS ladder now. No one can tell you whether that's better than waiting in short-term instruments.

But the LMP/RP framework at least allows you to make an informed decision.

Bill Bernstein

 

[eytonxav]

Probably not what you were looking for and won't keep up with inflation, but perhaps a higher cash buffer during times like this? I believe that some fund managers have recently increased their cash positions.

 

[mrfeh]

Lengthy thread at bogleheads you may find useful:

Bogleheads • View topic - To LMP or Not to LMP? [Liability Matching Portfolio]


Edited:

Sorry, that's not the thread I intended to point you at...try this one:

http://www.bogleheads.org/forum/viewtopic.php?f=10&t=106544

 

[pb4uski]

I'm very familiar with the approach in theory since I worked in the life insurance industry and duration matching is common. Most insurers I worked with sought to have the duration of assets supporting liabilities be close to the duration of the liabilities, to mitigate interest rate risk/disintermediation but true cash flow matching was rare in my experience though liability matching was not an area I specialized in but was just exposed to.

I don't see a true LMP/cash matching as being practical for individuals unless one has a very low withdrawal rate.

I think as a practical matter one could maintain a fixed income ladder that provides for any gap between living expenses and income (SS, pensions, etc.) for say, 10 years, and then invest the remainder with an eye towards an overall AA. Since most retirement portfolios would have at least 30-40% fixed income it seems to me that that would work reasonably and be practical and along with some flexibility on the spending side if things went to hell would work well.

 

[MichaelB]

Liability matching can be implemented for large groups where the outcome is predictable and can be modeled. Individual outcomes cannot be predicted so the liability cannot be precisely determined.

I think Mr. Bernstein is falling into a trap by trying to create the risk free plan. He has said in the past that there are too many variables, that has not changed.

 

[nun]

I retired earlier this year at age 52. About half my income comes from rent and back in the day I would have used a 5 year CD ladder to provide the rest topping it up from equity gains in good times. But CD ladders aren't too attractive right now so I just put 5 years worth of expenses in my 457 stable value fund paying 2.5%. I also have a TIAA variable annuity growing at 4.5% and the opportunity to use my Ex employers DC plan contributions to buy into their DB pension that starts paying out at age 55.

Right now I am 2% cash, 18% stable value, 20% bonds and 60% stocks. It will take 25% of my savings to buy into my ex-employer's DB plan, but that and rent will cover my living expenses and then I'll go with a 100% equities portfolio.

 

[brewer12345]

This also is a bit silly because what he is suggesting people do does not work given the yield curve and capital markets environment in existence today. Suggestions for a panglossian environment are nice, but as the bluegrass song says, "if wishes were horses I would ride, ride, ride..."

 

[samclem]

Liability matching can be implemented for large groups where the outcome is predictable and can be modeled. Individual outcomes cannot be predicted so the liability cannot be precisely determined.

I think Mr. Bernstein is falling into a trap by trying to create the risk free plan. He has said in the past that there are too many variables, that has not changed.

+1. And I'd add that there's a big difference between "risK" as understood by investment analysts (AKA "beta" or price variability) and "risk" as experienced in retirement (due to unanticipated expenses, high inflation, etc). Avoiding the first kind by taking on more of the second is not a good swap for most retirees.

I like Bill Bernstein's writings a lot, but I think he's taken an unfortunate turn.

 

[Midpack]

Liability matching can be implemented for large groups where the outcome is predictable and can be modeled. Individual outcomes cannot be predicted so the liability cannot be precisely determined.

I think Mr. Bernstein is falling into a trap by trying to create the risk free plan. He has said in the past that there are too many variables, that has not changed.

+1. And I'd add that there's a big difference between "risK" as understood by investment analysts (AKA "beta" or price variability) and "risk" as experienced in retirement (due to unanticipated expenses, high inflation, etc). Avoiding the first kind by taking on more of the second is not a good swap for most retirees.

I like Bill Bernstein's writings a lot, but I think he's taken an unfortunate turn.

Same impression I've gotten, and I just don't want to believe it. It seems he's recommending long after the fact what WOULD have worked better for all his clients who unexpectedly (to him) bailed during the during the 2008 meltdown - had they done so in advance. Doing it now is not much better than stuffing money in a mattress. Hard for me to understand given his past record. How the mighty have fallen...

 

[haha]

Bernstein is doing what a writer who wants to be commercially viable must do, and that is to move with his market. Even the slightest examination of what Bernstien2 is recommending tells us that it is impossible, just like Brewer says

Why is Ben Graham's advice unchanging? Because he is dead.

Ha

 

[clifp]

Bernstein is doing what a writer who wants to be commercially viable must do, and that is to move with his market. Even the slightest examination of what Bernstien2 is recommending tells us that it is impossible, just like Brewer says

Why is Ben Graham's advice unchanging? Because he is dead.

Ha

I have to say this is the first Bernstein book I read where I thought he was just trying to sell books.

It turns out even when the yield curves is favorable, it is hard to actually construct a true LMP.

I have patted myself many times on the back on the forum, for my skill (luck) buying about 400K worth of TIPs bonds after I did my 401K rollover into an IRA back in 2000. I also sold tech stocks and bought few hundred thousand worth of Muni bonds in my taxable account. I had just discovered the 4% rule, and with real interest rates on 10 year TIPs at 3.6-3.93% and long term Muni paying over 5%, GNMAs around 8% IIRC, it was good time to be a bond investor. Especially with the benefits of hindsight knowing there was a coming bear market in all stocks not just tech ones.

I had about $1 million in bonds which was a lot for stock guy. It was my attempt to develop a LMP portfolio long before the Bernstein put a name to it. I didn't actually have a strong view of where interest rates would go. I just knew the 45K+ the bonds provided was probably close to my minimum needs and it was reasonably well hedged against inflation.

As 40 year old I knew I need at least a 30 year perspective and was happy to buy longs bonds. But here is where the practical gets in the way of the theoretical. In theory at the time it was possible to buy 30 years TIPs, but the government wasn't issuing 30 year at the time I was buying, nor did Schwab have any 30 year TIPs in the secondary market. I guess I could have tried other brokerages, but I settled for 10 year TIPs.

It is also theoretically possible to buy non callable 30 year Muni bonds. But again could luck finding these creatures. It never cease to amaze me watching the credit rating of both my California and Puerto Rico bonds slide while they continually called the bonds I held earlier and reissued them with lower interest rates.

Almost 15 years later due primarily maturities and calls, all that is left of the circa 2000 bond portfolio is $15,000 of PR bond maturing in 2017. I've bought other bonds during the years but none with yields of those bonds.

 

[nun]

I have to say this is the first Bernstein book I read where I thought he was just trying to sell books.

It turns out even when the yield curves is favorable, it is hard to actually construct a true LMP.

Back in 1987 I stuck all my 403b money into TIAA-Traditional variable annuity because I though that retirement money should have some guarantee. I also decided to keep up voluntary contributions to the UK social security system while also paying FICA so I'll get two social security checks. I will also have two small DB pensions. At age 66 (in 2027) all those should produce an indexed $90k a year. Along with $15k in rent, that's my LMP and it's two times my anticipated annual expenses. FYI this plan was developed long before I'd heard of LMP, I simply wanted my basic retirement income to come from low risk sources and I have plenty of money in after tax and other retirement accounts invested in low cost equity index funds.

 

[Lsbcal]

The Fed has forced real rates below zero. I don't know when the situation will normalize but in some years we will again be able to get real positive returns without excessive risk. In the mean time it pays to follow the animal spirit opportunities IMO.

I would not have guessed that 6 years after the meltdown we are in such an investment climate. There are still people preparing for lots of inflation.

 

[mathjak107]

+1. And I'd add that there's a big difference between "risK" as understood by investment analysts (AKA "beta" or price variability) and "risk" as experienced in retirement (due to unanticipated expenses, high inflation, etc). Avoiding the first kind by taking on more of the second is not a good swap for most retirees.

I like Bill Bernstein's writings a lot, but I think he's taken an unfortunate turn.

i agree 100% on all here. while statistics about outcomes mean something to insurers they mean nothing to individuals.

as mortals we only can have 2 outcomes in life . things workout or they don't.