can anyone please help me with an explanation of lifestyle protection strategy in the chapter: goal based investing. m confused and i dont want to mug it up! CFA book explanation is an array of words and makes no sense to my mind at all. wud really appreciate ur help thanks!
I am also confused ! What are the focal/key points and conclusions ?
I think the key takeaway is that managing a portfolio against a benchmark is pretty moot from the viewpoint of the beneficiary. A portfolio manager can beat the S&P 5 years in a row but if the ending portfolio doesn’t meet individual’s objectives, what good is that? Absolute return > relative return.
Anyone have a brief summary of the contrast among Lifestyle Protection Strategies, Cash Flow Matching and Fixed Horizon Strategies ?
So just so we’re on the same page, you’re not talking about a brand of contraceptives, right?
CFAI book is not very clear about lifetime protection strategies. IMO, portfolios are constructed using worst sustainable spending rate and spending rate. An efficient frontier can be constructed using those variables instead of risk and return respectively. CF Matching is simple. It’s ideal for somebody that has fixed cash outflow on given dates and is not concerned about the volatility of bond prices because is expected to hold those bonds till maturity. Fixed Horizon Strategies involves combining a zero-coupon bond with a portfolio of risky securities. You have to buy a zero-coupon bond with a principal value equal to the minimum portfolio value at horizon. Because the price of the zero-coupon is less than its principal value, you invest the difference in risky securities. I don’t know it was clear.
mik82, Thanks for your response ! What I don’t understand well is the applications (in what scenarios) of Lifestyle Protection Strategies, Cash Flow Matching and Fixed Horizon Strategies respectively.
CFAI actually explains that well. Lifestyle protection strategies are applicable to individuals that need portfolios to fund certain general expenses. A portfolio that will “sustain” a given a given spending (therefore “lifestyle”). So create an asset allocation that will be able to fund withdrawals from clients (spending) over a certain time frame and not run out of capital. CF matching is similar but adequate for a client that knows exactly what her spending will be (for example every 15th of the month he/she has a mortgage pmt to make). Fixed Horizon Strategies are for somebody that is planning for retirement or for college education. So it sets a minimum portfolio value at horizon that MUST be met and invests now accordingly with combo of zero coupon + risky portfolio
mik82, Thank you !