Definition
Asset-Liability Matching
Asset-liability matching is the practice of aligning the timing and risk of your investments with the timing of the expenses (liabilities) they are meant to fund.
Money you will need soon — next year's school fees, an EMI, an imminent down payment — belongs in safe, liquid assets, because you cannot afford a market dip to coincide with the bill. Money for distant goals can sit in growth assets like equity, which need time to ride out volatility. Mismatching the two — holding long-term goals in cash, or short-term needs in stocks — is a common, costly error.
For individuals this often means a debt-fund or FD ladder for near-term goals and equity funds for the long run, gradually shifting a goal's corpus to safety as its deadline approaches (a glide path). Insurers and pension funds use the same principle at scale to ensure they can pay claims when due.
Related terms
- Bucket StrategyThe bucket strategy is a way of organising retirement or goal savings into separate 'buckets' by time horizon — short, medium and long term — each invested according to when its money is needed.
- Glide PathA glide path is a planned, gradual shift in your asset allocation from higher-risk to lower-risk investments as you approach a financial goal or retirement date.
- Sequence-of-Returns RiskSequence-of-returns risk is the danger that poor investment returns early in retirement — when you are withdrawing money — can permanently damage your portfolio, even if average returns are fine.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.