What is a characteristic of cash flow matching?

Cash flow matching is an investment strategy that aims to align cash inflows from an investment portfolio with specific future cash outflows, such as liabilities or obligations. The correct answer highlights a key characteristic of this strategy: it eliminates the need for reinvestment.

By ensuring that the cash flows from investments match the timing and amounts of expected future liabilities, investors effectively manage their cash flow needs without having to reinvest at uncertain future rates. This stability is particularly beneficial for entities that have fixed obligations, such as pension plans or insurance companies, as it mitigates the risk associated with fluctuating interest rates or changing market conditions.

In contrast to other investment strategies, cash flow matching prioritizes certainty over growth, making appreciation less of a focus. Consequently, while appreciation can be beneficial, it is not a primary goal of cash flow matching, which is more concerned with meeting obligations as they arise.

Understanding this characteristic helps clarify the strategy's role in risk management and its suitability for investors with predictable cash flow needs.