GMO’s New Asset Management Platform

When I heard that the investment management firm GMO had created a retirement planning tool to mitigate “sequence of returns” risk I looked forward to learning about it. After setting aside a stumbling block or two in its white papers, I found it to be the best platform for financial advisors I have ever seen.

The right measure of risk

The key to Nebo’s success is its signature feature – a return to sanity after a 70-year departure. Nebo’s defining premise is that risk is not volatility, it is “not having what you need, when you need it.” This frees it completely from the conventional but senseless approach, the search for the level of volatility that is “right for the client,” to pursue a mean-variance-optimized asset allocation, and then to maintain that same asset allocation mindlessly through “rebalancing.”

When you approach it as a problem of minimizing the risk of “not having what you need, when you need it,” all of this goes away. Now you have a different mathematical problem, the problem of adhering to a future course of spending while not running out of funds. Since there is no absolute guarantee of not running out of funds, the objective is to minimize the likelihood of going meaningfully into the red.

This is what Nebo’s mathematical approach and software does. By applying the calculus of variations to solve for a series of asset allocations over time, Nebo’s creator, Martin Tarlie, derives a glidepath that defends against that risk. Thus, it maximizes the chances of achieving your spending and wealth goals.