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, and thus deliver an overall balanced and diversified investment process.

Keywords: Asset Allocation, Liquidity, Income, Capital Preservation, Growth

JEL Classification: G11, G23