4×4 Asset Allocation

Abstract

We propose the following structured approach to asset allocation: all assets and liabilities in any portfolio should be thought of as means contributing to the following four ends: • Liquidity maintenance: nominally safe and quickly accessible “cash-like” pool of assets, • Income generation: relatively regular, certain and near-term cash payments, • Preservation of (real) capital: assets expected to retain their value over time, • Growth: more volatile assets and strategies expected to generate future cash payments. We believe that all 4 areas should be “powered,” giving our approach its 4×4 name. Further, we suggest that investors should start their asset allocation process by explicitly setting a strategic investment horizon over which they seek to achieve their goals, and building strategic 4×4 portfolios. Investment portfolios should then be rebalanced with some regular tactical frequency in order to re-align with the strategic investment horizon goals, while also managing tactical risk, return, and cash flows.