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What Is a Matching Strategy?

Jim B.
Jim B.

In the world of finance, a matching strategy is used to construct portfolios for investors who know how much capital they'll need in the future and the approximate times when they'll need that capital. Once these variables are known, investments are chosen to match those needs as closely as possible. This process is generally achieved through fixed income investments, which usually guarantee returns to investors at regular intervals. It is wise to use a matching strategy whenever the situation calls for cash flow to be generated at specific times in a person's life, such as an individual preparing for retirement or someone who needs to make a large expenditure.

Many investors create their portfolios thinking about the future and how their investments will create cash flow when it is needed the most. These people are likely to choose their investments with those necessities always in the front of their minds, and they are also less likely to take large risks in any market. For people like this, the best maneuver they can make might be a matching strategy, which essentially matches investments up with needs.

Man climbing a rope
Man climbing a rope

The most critical component of a matching strategy is often timing. Investors choosing such a strategy are likely to have certain dates in mind for when they would like to receive the large bulk of their investment returns. Since that is the case, the vehicles chosen must be structured so that payoffs occur as closely as possible to the targeted dates on the investor's schedule.

One way to achieve this is through the use of fixed income investments. These investments return payments at regular intervals, such as bonds with interest payments and return of principal or annuities that yield monthly payments. Although stocks are not generally considered to be fixed income investments, they may be utilized in a matching strategy if the companies that issue them pay out regular dividends. All of these instruments should be of various durations, so that their payments can be times to when the investor needs them.

Retirees are the most likely people to choose a matching strategy. These people know they won't be able to count on income from a job and, as a result, must rely on the regular income from their investments. In addition, people who know they are going to make a large capital expenditure at some point might also consider this strategy. For example, people trying to pay off a mortgage or paying for their children's college education can set up their investments with these events in mind.

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