ALM for Financial Resilience in Turbulent Times

ALM for Financial Resilience in Turbulent Times
Craig Kiggen, Managing Director and Advisory Partner at Consolidated Wealth Group

Four practices that you can adopt today to safeguard your investments tomorrow

Warren Buffet, arguably one of the world’s best investors, has one rule when investing: never lose money. A great philosophy, but with worrying headlines about another wave of COVID-19 and it’s implications for our economy, you may be questioning the reliability of your investments to continue delivering your retirement income needs.

To help you stay financially resilient in these trying times, there are some strategies that you can adopt to safeguard your capital and manage your cash flow.

Following a year of see-saw markets in 2020, investors are naturally apprehensive says Craig Kiggen, Managing Director and Advisory Partner at Consolidated Wealth Group. “Last year’s crash severely impacted financial markets and while this caused many investors to panic, our retired clients continued to receive their incomes,” says Craig. “Despite the negative effects of the sharply declining global market, we saw very little capital erosion in the investment structures.”

Craig shares his three key takeaways for using Asset Liability Matching (ALM) to cultivate financial resilience and put “shock absorbers” into your investment strategy, giving you the ability to protect your income during volatile times.

1. A Powerful Tool

Traditionally investors draw across their entire portfolio to give themselves an income. ALM is a powerful tool in this regard as it offers investors protection by allowing them to allocate capital according to their drawdown needs. While ALM is not common practice, we have been using it successfully to match client’s day-to-day living expenses – their liabilities – to their investments and assets, delivering the additional liquidity they require to meet their lifestyle expenses without placing unexpected strain on capital during negative market cycles.

2. The downside of protection of Capital

Everyone wants their assets to be fruitful and multiply and the key to successful long-term investing is protecting and preserving your capital in a negative market, without missing out on opportunities when the market starts appreciating. By using an ALM strategy, the growth assets are ready to participate in the market growth when the market moves.

3. Does ALM cause a lag in your performance?

ALM detractors argue that it could cause a lag on returns, specially when markets are in a bull run. In our experience, however, this only occurs if the balance between various asset classes are not appropriately managed and aligned with the investor’s needs. To optimise returns, it is our recommendation that investors work with a financial adviser who is well versed in ALM strategies and has a proven track record working with client funds.

Craig concludes: “While there will never be a one-size-fits-all solution, Asset and Liability Matching has proved to be a sound strategy for our clients during the COVID season. ALM has not only sustained their cash flow, it has delivered significant improvements in our client’s portfolio’s.”