Immunization (in Finance) - Part Uno
They aren't just for the health space
There is a concept that I have indirectly talked about in many, many posts without formally introducing the technical concept.
It is one of my favorite concepts and when done correctly, it is a huge win for your finances and mental health.
It is called ‘immunization’.
In the purest sense, it is something done by pretty much every large company that has some future money they need to pay out (liabilities), but it is very heavily used in the financial services world (banks, insurance companies, etc).
Consider a bank that knows it has a book of certificates of deposit (CDs) that mature at various points over the next 5 years. They need to invest assets to line up with those maturing CDs to make payments.
If there is $100 of CD maturing in a year, the bank can buy a 1-year UST that matures for $100. Same with the 2 year, 3 year,…etc etc. The end result is that the Bank has a maturing ‘risk-free’ asset that exactly matches up with its future liability (paying the customer the value of the maturing CD back).
Since every future cash outflow from the bank has a matching cash inflow the bank is cash flow matched. This makes for a fairly low-risk situation. There is very little or no risk at all from things like reinvestments, market value changes, credit (aka defaults) etc.
This is one of the simplest and most vanilla versions of immunization there is. But the concept is essentially the same across companies and industries.
And if you understand the value in an immunized position, you can use it in your personal finances as well, for some really big benefits.
So today, we will finally fully explain how to use immunization to dominate your finances.