3 Approaches to Asset Allocation: Asset-Only, Liability-Relative, and Goals-Based

3 Approaches to Asset Allocation: Asset-Only, Liability-Relative, and Goals-Based

Asset allocation forms the backbone of effective portfolio construction. It helps determine how best to allocate investments across asset classes, such as equities, bonds, and cash, to achieve an optimal risk–reward ratio. According to Vanguard, more than 90% of the variability in portfolio returns is explained by asset allocation.⁽¹⁾
There are three generic approaches to asset allocation: Asset-Only, Liability-Relative, and Goals-Based. In the Asset-Only approach, investment decisions are made without considering future obligations. Analysis in this case is geared toward deriving higher returns through risk exposure, for example, via mean-variance optimization. This approach is well suited for investors with long-term horizons and limited future obligations, such as individuals focused on growth or endowments.
The Liability-Relative approach is commonly employed by pension funds and insurance companies. Under this framework, asset–liability matching is conducted based on future obligations that must be met. The emphasis is placed on managing funding risk rather than maximizing returns. Goals-Based investing, by contrast, segments an individual’s life into identifiable financial goals—such as retirement, education, and travel—with asset allocation conducted on a per-goal basis. According to Morningstar, this approach helps sharpen the focus on what investors truly want.⁽²⁾
Each paradigm offers a distinct perspective on wealth management. The choice among the three depends on the investor’s current profile, immediate priorities, and long-term aspirations.

Asset-Only Approach
The Asset-Only approach to asset allocation is the oldest mathematically grounded framework in portfolio management. It considers only the investor’s assets, largely disregarding future liabilities or obligations. The objective is to maximize risk-adjusted returns, typically evaluated using the Sharpe ratio, which measures the excess return earned per unit of risk assumed.
The theoretical foundation of this approach originates from Modern Portfolio Theory (MPT), developed by Harry Markowitz, which emphasizes diversification as a means of achieving the highest expected return for a given level of risk. Portfolios are constructed using mean-variance optimization techniques that lie on the efficient frontier–that is, the set of portfolios that deliver the maximum expected return for each specified level of risk. Asset performance is typically evaluated relative to a market index or benchmark, such as the S&P 500, making this approach popular among hedge funds, endowments, and growth-oriented individual investors.
The primary advantages of the Asset-Only model are its simplicity and mathematical elegance. It provides clarity in the decision-making process and is well suited for implementation using quantitative tools (QT). However, the primary limitation is its limited consideration of future liabilities—such as retirement spending or insurance payouts–which may result in portfolio returns that are misaligned with actual financial needs.
As noted by AnalystPrep, “The most common form of asset-only management is mean-variance optimization. This analytical framework follows modern portfolio theory to create a mathematically superior portfolio for a given investor’s needs. Increasing the Sharpe ratio of the portfolio within the IPS constraints is the ultimate goal.”⁽³⁾
The Asset-Only approach has proven to be an effective wealth-accumulation tool for investors with undefined or flexible future obligations; however, when liabilities are clearly defined, it offers insufficient structure to ensure long-term financial security.

Liability-Relative Approach
The Liability-Relative Approach, also known as Liability-Driven Investment (LDI), represents the conceptual opposite of traditional asset-only allocation. Under this framework, investments are structured around the value and timing of an investor’s future liabilities rather than around return maximization. The objective is to ensure that liabilities are met as they fall due, which is particularly critical for institutions such as pension funds and insurance companies, whose existence depends fundamentally on solvency and reliability.
At its core, LDI is based on asset–liability matching. For investors, this involves constructing portfolios aligned with the timing and magnitude of projected future obligations using techniques such as duration matching, immunization, and surplus optimization–the calculation of the difference between asset values and the present value of liabilities. These methods aim to minimize funding risk and provide protection against interest rate and inflation volatility.
According to Investopedia, “In essence, the liability-driven investment strategy (LDI) is an investment strategy of a company or individual based on the cash flows needed to fund future liabilities. It is sometimes referred to as a ‘dedicated portfolio’ strategy. It differs from a ‘benchmark-driven’ strategy, which is based on achieving better returns than an external index such as the S&P 500 or a combination of indices that invest in the same types of asset classes.”⁽⁴⁾
Like most conservative investment frameworks, LDI prioritizes stability over growth and therefore may limit upside potential. In addition, modeling future liabilities—often extending over several decades—requires complex actuarial and financial forecasting. Discipline and risk awareness remain defining characteristics of LDI, regardless of market conditions. In essence, the objective is not to outperform the market, but to fulfill promised obligations.

Goals-Based Investing
Investing may be viewed from a different perspective when it is not measured solely against market benchmarks or abstract return targets. Instead, it focuses on what is most meaningful to the investor—whether funding a child’s education, setting aside resources for a comfortable retirement, or supporting a cause that is personally important. Each of these objectives, in turn, gives rise to a distinct investment strategy.
For each goal, a dedicated sub-portfolio is constructed based on the relevant time horizon, risk tolerance, and cash-flow requirements. For example, a car purchase—a short-term objective—would typically be allocated to low-risk, short-duration assets, while equities would be more appropriate for long-term goals such as retirement. As noted by Morningstar, “Goals-based investing gives investors something to focus on. It’s specific and realistic. It provides a reliable foundation for measuring personalized success, and it’s been proven to increase client wealth by more than 15%.”⁽²⁾
This approach incorporates time-horizon planning and cash-flow matching into the investment process, ensuring that each portfolio is aligned with when and how funds will be needed. By introducing a built-in discipline, it can help investors maintain emotional balance through periods of market volatility. That said, goals-based investing does not eliminate the need for detailed planning and may be less efficient than traditional models focused solely on return optimization. Nevertheless, for many investors, efficiency is not the sole objective; ultimately, success is not just about outperforming the market, but about achieving what truly matters to the individual.

What This Means in Practice
Choosing asset allocation is, in fact, very personal and often complex, as it delves into characteristics such as personality, time horizon, risk tolerance, and financial objectives. For instance, a long-horizon investor may benefit from a high-risk, Asset-Only growth strategy, whereas a pension fund, which must meet fixed future payouts, is more inclined to adopt a Liability-Relative approach that increases the likelihood of meeting its obligations. A retired individual with multiple, sometimes competing, life goals—such as travel, health care, and legacy planning—may find a Goals-Based approach more accommodating both emotionally and practically. Most investors, however, tend to adopt hybrid approaches that combine all three methods. For example, an individual might apply Asset-Only principles to discretionary wealth, use Liability-Relative methodologies for mortgage planning, and maintain a Goals-Based portfolio for retirement and education. This can result in a sophisticated yet resilient financial plan.

Conclusion
Although the three fund allocation methods—Asset-Only, Liability-Relative, and Goals-Based—each offer distinct advantages, their respective areas of focus differ meaningfully. The Asset-Only approach concentrates on maximizing returns; the Liability-Relative approach emphasizes meeting defined obligations; and the Goals-Based approach focuses on funding specific objectives along a personal timeline.
The Asset-Only method is efficient and relatively simple, but it may overlook real-world liabilities. Liability-Relative strategies provide stability at the expense of some growth. Goals-Based investing is personally relevant and intuitively appealing but may require more extensive planning. Ultimately, the approach that best aligns with both financial realities and personal values should be selected. Alignment between strategy and psychology ensures that a portfolio is constructed not only for performance, but also for the fulfillment of one’s life goals.

Sources:

1.      Vanguard, Adding Value through a strategic approach, July 28, 2025

2.      Morningstar, How to Make Goal-Based Investing More Effective, February 15, 2024

3.      AnalystPrep, Approaches to Asset Allocation, March 18, 2024

4.      Wikipedia, Liability-driven investment strategy

5.      Breaking Down Finance, Approaches to Asset Allocation

6.      Analyst Prep, Approaches to Asset Allocation, July 31, 2024

Disclaimer: This article is for educational purposes only and is based on publicly available sources. While efforts have been made to ensure accuracy, the content should not be considered professional advice