Safety Net Investing and How It Works - A Summary

Safety Net Investing? Never heard of it!

Well, it’s a different way of thinking about how to invest, that starts by building a Safety Net at the limit of your capacity to take risk.

So, what’s a Safety Net?

A Safety Net is exactly what it sounds like – it’s a number that you do not want your account balance (or income level) as of some future date to fall below,  no matter what happens with Interest rates, the stock market or the bond market.

The number is called the “safety net level” and the date in the future is called the “target date”.

Once you have set those two numbers (the safety net level and the target date), your job as an investor is done.

It becomes the job of the investment engine to try to make sure that when the target date arrives, your account balance (or income) does not end up below the safety net level you have set for that account.

So, how does the engine work?

One way to think about it is that the engine is monitoring (i) the safety net level you set for your account, (ii) the target date and (iii) the actual account value. Based on these three numbers it comes up with a customized allocation for that account. The allocation is a mix of two components:

(a) a Performance Component: a diversified portfolio of investments that are designed for performance but also carry a significant risk of losing money (e.g. it could include investments such as the S&P500, real estate ETFs, and/or international stocks), and,

(b) a Safety Component: a mix of ultra-low risk mix of U.S. Treasury Bonds that are specifically matched to your investment horizon to try and minimize interest rate risk

Can you guarantee I won’t end up below my Safety Net at the target date?

No. The system is designed to minimize the chance of that occurring, and is based on sophisticated techniques that the largest and most sophisticated investors have used for decades (e.g. Liability Driven Investing, Asset Liability Management and Dynamic Asset Allocation techniques such as CPPI ). However, there is always a possibility, however small, that the engine might fail and you might end up below your Safety Net on the Target Date.

How about before the target date?

Remember: The job of the engine is to try and make sure the account value is higher than the safety net number at the target date.

Therefore, the engine will allow your account to dip below your safety net prior to your target date.

However, it will always try and make sure that your account value plus any interest you are scheduled to collect from your Treasury Bonds before your Target Date will add up to a number above your Safety Net.

For a more detailed explanation of Safety Net Investing