Asset Liability Management, an insurance industry term, can be loosely defined as:
The practice of mitigating financial risks resulting from a mismatch of assets and liabilities.
CFI
In one’s own life, ALM is mostly practiced with respect to cash in the bank as assets and monthly expenses as liabilities. Said simply, do I have enough cash to pay my bills and for a rainy day or unplanned expenses? When a W2 income is in the picture, ALM is easy. Paychecks are assets that can be immediately applied against liabilities. So long as you keep your job and your spending is slightly less than the paychecks, it’s all good.
However, depending on investments to fund one’s life complicates things. Stocks have a historical return of something like 7%. But ensure with a high degree of certainty that you capture that 7%, the investment horizon is long, perhaps even in decades. Investing in stocks hoping to achieve the long term historical return is a good idea, when the liability the stock investment will eventually pay is decades away. Namely, retirement is often one’s main liability that is potentially decades into the future.
But if you’re closer to that retirement phase, or the liability that you are investing for is a more near term liability, investing in stocks hoping to clip the long term return on a short term basis, is a massive asset / liability mismatch. Imagine taking one’s savings for a down-payment on a home and investing it in stocks despite planning to purchase a house in the next year or two. If you invested on January 1, you would be down near 20% and not have the desired down payment if the perfect house popped up.
As such, asset liability management is critical, and in my opinion undervalued. Are there people that hold mostly stocks even in retirement? Sure, but they are overcapitalized on the stock side of the house and can tolerate major downdrafts in their stock account and still fund their liabilities.
All is to say, considering all asset classes and their respective durations against potential liabilities is just as important if not more, than individual asset selection.