Balancing Investments with Liabilities | Long Island Financial Planner


By: Steven M. Rogé, MBA, AIF®
Director of Research and Portfolio Management

Going back thousands of years, one of the very basic ways to measure was done using a Balance Scale. Simply knowing the weight on one side and loading up the other side of the scale would give the weight measurement of an item. This primitive process isn’t that different from a process that our experienced Senior Wealth Advisors use to gauge a client’s future financial needs and future liabilities. We start by preparing our clients with the ability to offset future liabilities with their assets. Assets and liabilities can be weighed in different manners and have five main characteristics:

  1. Predictability
  2. Timing
  3. Magnitude
  4. Inflation
  5. Denomination

Some liabilities are predictable such as household expenses, mortgage and car payments. They occur on a normal schedule, and as long as you live in a first world country such as the United States, you can expect those expenses to be stable because inflation is controlled by monetary policy. Offsetting these liabilities with assets is easily accomplished using monthly income and checking accounts. These are considered short-term assets and short-term liabilities.

Expenses like natural disasters, job loss, or medical emergencies, are unpredictable. For these liabilities it’s best to establish an emergency account that is liquid, such as a savings account, but that has the opportunity to earn more of a return than zero, such as a checking account. While sometimes considered an investment, insurance coverage may help protect from low probability, but highly catastrophic events. Homeowners insurance, auto insurance and umbrella policies are a few to consider.

We are probably all most familiar with the timing of liabilities and the pairing of investments. That is, longer-term liabilities can be paid with higher risk-reward investments such as stocks, while expenses in the near future are better off paired with fixed income and savings accounts. It’s important to make sure that investments with large variances in return are given time to revert to its long-term expected rate of return. The variability of stocks in any given year is large, and can typically range between -2% and 6%. However, there are outliers in those returns which could wreck havoc on liability pairing if time horizons are mismatched. Our general guideline is to pair liabilities with time horizons as follows:


Magnitude cannot be discussed without the addition of inflation. While many attempt back-of-the-envelope ways to calculate such things as retirement, education, and elder care, most will fall short of factoring in all the variables – one of the biggest variables being inflation. Inflation rates can vary between liabilities. No two liabilities are the same, and subsequently, a multi-factor model for estimating future liabilities is needed. Most investors know the time value of money, or the concept that an expense in the future will be much greater than it is currently. For this reason it’s important to match the amount of savings today, regardless of the investment vehicle, to the future inflated liability.

One area of liability pairing that doesn’t get discussed much is in which currency one’s liabilities will be owed. This is also one area which we believe other financial advisors take for granted, or are missing the mark. While every client has a unique situation, almost all of our clients will face future liabilities that need to be paid in U.S. dollars. This is one of the primary reasons we have U.S. dollar centric portfolios. We believe that the amount of international exposure in our clients’ portfolios should primarily come from U.S. based companies with global operations.

Matching your investment’s denomination with your liabilities denomination removes a layer of unpredictability from the portfolio, as well as, liability-asset pairing projections. In the event that a client has a high likelihood of retiring overseas, we would need to invest more heavily in the currency corresponding to the liabilities and adjust the portfolio accordingly. This mitigates a currency movement that could undermine a well thought out long-term savings and investment plan.

Finally, all of these characteristics have to be taken in the context of a client’s tolerance for volatility, or risk-aversion. Somebody with very little tolerance for the ups and downs of the stock market should not be invested in an overly stock-centric portfolio, because they are unlikely to be able to ride out the downturns. Longer-dated bonds that match-up with a particular liability may be used as a suitable substitute, however the client must realize that giving up potential return will require more income to make up the difference in long-term compounded returns.

Whether your retirement plans are more domestic or exotic, you can be sure that our experienced team of Senior Wealth Advisors has all the strategies covered. Like the balance scale, they help weigh, measure and calculate your future financial needs and liabilities. Whatever your future might be, it’s important to prepare for life’s expected as well as unexpected twists and turns.

If you have questions on your retirement plans, please feel free to contact one of our Senior Wealth Advisors at 631.218.0077 or at

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