Nebo - GMO’s New Asset Management Platform

The advisors who are listening to this podcast will start a financial-planning process with a risk assessment for a client.  That exercise will evaluate how much volatility the client can tolerate. It will serve as input to constructing a portfolio that optimizes returns given a client’s risk tolerance.

My guest today is here to explain why that is the wrong approach.  The problem is not to minimize volatility, he says, but to figure out how money a client needs, when they need it, and to solve for that problem.

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Here is a link to the Nebo site.

a. Investing for Retirement III: Understanding and Dealing with Sequence Risk Sequence of return risk is entirely ignored in much of academic finance. But it is a meaningful risk for the vast majority of investment portfolios and there are useful tools that can mitigate its effects. We believe a portfolio construction framework that takes into account the lifespan of the portfolio and its expected cashflows can account for sequence of return risk better than any standard single-period optimization. And by dynamically reallocating portfolios, portfolio managers can substantially further improve outcomes for their clients

b. Investing for Retirement II: Modeling Your Assets Standard financial industry practice builds retirement portfolios using mean-variance optimization and validates them using Monte Carlo simulations that assume asset returns are a random walk. The unsurprising result of a process stuck over 50 years in the past is portfolios that burden future retirees with an unnecessarily high risk of financial ruin.

We believe an approach to retirement investing that better models and understands the ways in which financial markets differ from the outdated academic assumptions of market efficiency and random walks will result in substantially superior portfolios.

c. Investing for Retirement: The Defined Contribution Challenge The retirement landscape has changed. The risk of failure with the traditional glide paths and savings/spending assumptions seems to us to be disturbingly high.

To address this shortcoming, we introduce a framework based on a common-sense definition of risk: not having enough wealth in retirement. The goal is not to put investors into yachts, but rather to increase the odds that they have the appropriate level of resources in retirement. We show that dynamic asset allocation – moving your assets – is an essential part of achieving retirement goals.

Note: this was one of the most downloaded papers on Advisor Perspectives in 2014.

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