4×4 Goal Parity

Abstract

In the 4×4 Asset Allocation framework 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 long-run returns.

We illustrate the investor-specific quantification of these four goals with decades of empirical data for a wide variety of liquid and private assets, fund indices, and alternative premia strategies. Further, using 1970-2022 data, we simulate strategic Goal Parity Balanced portfolios seeking to have all the four goals equally “powered,” as well as strategic Goal Tilted portfolios emphasizing one of the goals. Over the 50+ years of our simulation, a Goal Parity portfolio achieves highly competitive risk-adjusted returns relative to traditional benchmarks, in particular delivering shallower drawdowns in various crisis and inflationary periods. Our Growth-tilted portfolio diversifies and outperforms equities with shallower drawdowns, and our Preservation- tilted portfolio has a very distinct performance pattern: it lags equities during bull markets but delivers robust performance in bear markets. Overall, we have empirically demonstrated that the 4×4 approach provides a powerful goal-based, investor-specific asset management framework.

Keywords: Strategic Asset Allocation, Goal Based Investing, Portfolio Construction, Liquidity, Income, Capital Preservation, Growth

JEL Classification: G11, G23