Liability-Driven Investing: A Smarter Retirement Strategy for Volatile Markets
When markets are volatile and headlines are chaotic, it’s natural to feel uncertain—especially if you’re retired or nearing retirement.
You may be wondering:
- Should I move more into cash?
- How can I avoid selling investments at a loss?
- Is my retirement income plan still on track?
These are real concerns. But the solution isn’t necessarily changing your risk tolerance or chasing a new allocation model. It’s rethinking how your investment strategy connects to your financial plan.
That’s where Liability-Driven Investing (LDI) comes in.
Why Traditional Retirement Strategies Often Fall Short
Most retirement portfolios are built on risk profiles and broad market assumptions. But retirement isn’t lived in averages. It’s lived year-by-year, with real expenses and changing market conditions.
Traditional portfolios don’t always account for:
- When you’ll need the money
- How much income you'll need in each year
- What happens when the market dips right before you need to make a withdrawal
What Is Liability-Driven Investing?
Liability-Driven Investing (LDI) starts by identifying your future cash flow needs—your “liabilities”—and building a portfolio designed to meet them.
This approach flips the usual investment process: Rather than starting with a model portfolio, LDI begins with your financial plan and uses that to shape your investment strategy.
Asset Dedication: A Practical Approach to LDI
One of the most effective ways to implement LDI is through Asset Dedication, which breaks your portfolio into three distinct parts:
- Cash Portfolio: Covers current-year expenses with minimal risk. Typically held in a money market or savings account.
- Income Portfolio (Bond Ladder): Uses a ladder of individual bonds timed to mature when you need the money—usually over a 5–10 year horizon.
- Growth Portfolio: Invests for the long term (stocks, ETFs, etc.) to replenish the income portfolio and hedge against inflation.
The Role of a Bond Ladder in Rising and Falling Interest Rates
A bond ladder adapts naturally to changing interest rates:
- In a rising rate environment, maturing bonds are reinvested at higher yields—boosting income over time.
- In a falling rate environment, longer-term bonds already locked in help maintain higher income.
- Either way, your cash flow stays predictable.
Why LDI Works—Especially in Volatile Markets
Liability-driven investing brings unique advantages, particularly when market volatility is high or uncertainty is elevated:
Predictable Cash Flow
You’re not guessing where your income will come from each year—it’s already scheduled.
Less Emotional Decision-Making
No need to sell stocks in a downturn just to meet living expenses.
Room to Grow
With near-term needs covered, your Growth Portfolio can stay invested and ride out market fluctuations.
The Foundation of LDI: Your Financial Plan
Liability-Driven Investing isn’t just a strategy—it’s the natural result of aligning your investment approach with your financial plan.
Your plan defines:
- What you want to do
- When you need the money
- How much risk you’re willing to take
From there, the investment strategy becomes simple: match your portfolio to your plan.
Is Liability-Driven Investing Right for You?
If you’re in or approaching retirement—or just looking for more predictability in unpredictable markets—LDI could be a smart fit.
It helps you:
- Reduce stress during volatility
- Avoid panic selling
- Keep your long-term goals in focus
Ready to Align Your Portfolio With Your Plan? Let’s talk about how liability-driven investing could work for you.
John Miller, CFP® of Longview Advisors provides comprehensive wealth management and financial planning services on a purely fee-only (fiduciary) basis. The company has offices in Wichita and Newton and serves clients throughout Kansas and the United States. Prospective clients can hire the company for wealth management services on an annual retainer, which includes ongoing investment management and financial planning. This includes tax and estate planning, portfolio analysis, retirement planning, and additional planning as needed. The firm also offers hourly financial planning.