Dedicated Portfolio Theory Could Work for Millennials

 In Bond Investing, Personal Finance

millennialsMillennials are a different generation for some reasons. Amongst them, though, is the fact that they saw a trusted economic system most took for granted crumble around them. They saw banks fail and billion-dollar bailouts. Unlike many who came before them, they no longer feel safe assuming that standard investments can protect them. Fortunately, there is a real alternative available.

The Benefits of Bonds

Many have looked for the safe bet by turning to individual bonds (some have gone for bond funds too). They appreciate that bonds give them a finite maturity date where they can get their money back.
Although there is some risk involved in corporate bonds, they also appreciate that it’s easier to find options safer than putting money into the stock market.

Introducing Dedicated Portfolio Theory

DPT (Dedicated Portfolio Theory) deals in finance with portfolios built to match future inflows with outflows.The idea is to purchase an “income portfolio” that’s made up of laddered bonds. These then provide the income to match withdrawals necessary for the five to 10 year span.

By holding each of the individual bonds until maturity, they produce an income that’s immunized against the market’s swings. This strategy creates a far more predictable floor than any other alternative investment.

Furthermore, everything else in the portfolio is invested in growth.

As time goes on, the individual bonds gets replenished. This ladder of bonds, as they’re called, continues to get extended with each sale and purchase.
Of course, the investor doesn’t need to make any withdrawals either. Funds from the maturing bonds can simply be used to purchase another bond.

Using DPT for Millennials

In the past, using individual bonds in a DPT approach has been considered a good strategy for retirees to adopt.

However, you can probably see how this would make a lot of sense for Millennials too. Their age works to their advantage because they can simply take the income from bonds and proceeds from matured bonds and buy more bonds over and over again, far more often than retirees ever could. By the time they hit retirement, the power of compounding could build up serious wealth for themselves.

That being said, there’s another reason DPT is ideal for millennials. Aside from what we covered above, retirees also love this theory because they’re usually quite risk-averse. At their age, they don’t have time to make the money back if they lose it because of unforeseen circumstances.

Well, as it turns out, millennials feel the same way. A study done by FinaMetrica found that millennials are conservative with their money, especially when it comes to investments.

If you’re a millennial or a financial advisor for one, perhaps you’ve already looked into individual bonds as the smart bet for investing. Still, you should consider leveraging Dedicated Portfolio Theory as well. The study we mentioned above makes it very clear that millennials don’t want to gamble with their savings and DTP offers the best possible strategy for conservative growth.


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Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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