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I think it probably works well enough for an account like an IRA that must be drawn down.
But then I've never been able to figure out the difference between an allocation strategy and a bucket strategy.
Kitces (2014) suggests that simple static allocations yield better results than bucket strategies, unless the latter involve rebalancing. More precisely, based on U.S. evidence beginning in 1966, he shows that bucketing with rebalancing yields the same performance as static strategies
That didn't help. And neither did any number of M* Christine articles before I quit.
But then I've never been able to figure out the difference between an allocation strategy and a bucket strategy.
One can get almost 4% return from parked cash these days. No great, but not necessarily a drag on overall returns. If a retiree were to re-balance yearly, the funds positioned in the cash bucket might amount to a small amount of money (compared to the overall portfolio) further reducing its potential drag.
Allocating 1 year of withdrawals into a Cash bucket (spending purposes) seems like a reasonable strategy.
Might a retiree think of the cash bucket investment (@ 4%) as one part of their overall yearly portfolio that is re-balanced yearly?
Cash (based on 1 yr needs) Bonds & Equities (based on investors risk profile and time horizon)
If 4% is held in Cash, 96% would be held in Equity/Bonds.
Alternately:
A retiree could withdraw from their bonds monthly, quarterly, yearly and reallocate between Bonds & Equities yearly.
Bonds are typically the "less risky" assets that serve a more important role in countering the volatility of "riskier" assets in one's portfolio.
If a retiree needed a 4% SWR for spending, and the cash were to be subtracted from the bonds in a 60/40 allocated portfolio that (40% bond position), the withdrawal rate would be close to 10% (4%/40%) from the bonds. This would required a larger portion of equities to be reallocated to bonds each and every year to maintain that 60/40 allocation.
Cash (aka cash bucket strategy) typically is a "risk free" investment and is held in small amounts (compared to one's overall portfolio) for the purpose of spending.
It seems all three have a purpose in a retiree's portfolio.
The buckets just always seemed too complicated to me. Maybe the explanations were too complicated? Everyone's circumstances are unique. If one is single with no obligations, that person may have the time to devote to getting the process just right. I'm fortunate in that my spouse still works. That fact provides an entirely different landscape for our living.
I enjoy doing the research, keeping an eye out for one more new destination for the moolah, whenever the current holdings each get to 8% of the total. One of mine offers an 8% dividend. But it would be foolhardy to go chasing that for its own sake, and I'm not going to overload the portfolio with that one. (Thanks, @Catch22.) At Stocktwits, another fellow was boasting that the size of his stash in ET gives him a quarterly dividend of $5,000.00. I'll never have a portfolio of THAT size. "Prudence is a virtue."
It's an interesting discussion which various board members have touched on elaborated on over the years. First, we need to agree on / define what the bucket approach espouses. Many conflate this with standard portfolio allocations (% to cash, % to equities, % to bonds or commodities, etc.) As I understand it (and as the opening of the video suggests) the bucket approach is mainly about stashing a large cash stockpile in a bucket to cover anticipated near-term needs. 3-4 years' worth of cash is often used. Typically, there's a second "moderate risk" bucket (perhaps to meet needs 3-6 years out) which you wouldn't need to tap until bucket #1 is exhausted. This approach allows you to carry additional risk in your remaining buckets knowing you won't need that money soon. Additional risk should equal additional reward. I have no quarrel with that approach. Makes sense. The expectation is that during market downdrafts you can keep your hands off the riskier bucket(s) and live comfortably off the near-term / intermediate term buckets. There are no guarantees - never are in investing.
I've never subscribed to that approach. The difference may be in having a defined benefit plan that pretty much covers essentials. But some of my "one-bucket" thinking relates to carrying a more conservative portfolio than I suspect most here do. Also, I try to pull larger sums for major expenses when times are good. Let it ride and rebalance when markets swoon. Again, there are no guarantees. Other than the current year's budgeted needs I don't hold a cash stash. That said, a healthy allocation to fixed income is part of the one bucket approach. Yes, doing it this way does ding you if you need to draw a large sum out during a nasty market slump. The counter to that is that during normal times you're not committing an inordinate amount of your portfolio to low yielding cash.
I suspect there's not as much difference as sometimes attributed to the two different approaches. I'd never argue my one-bucket method works better than the multi-bucket brigade does, although that seems to be the (attached video) speaker's argument. I'll add that while it sounds good in theory it would take nerves of steel to be stoically drawing down your near-term / intermediate-term bucket(s) over a 3-5 year span as your long-term bucket declined 50% in value!
Time to run the blower if I can figure out where the driveway is.
Comments
But then I've never been able to figure out the difference between an allocation strategy and a bucket strategy. That didn't help. And neither did any number of M* Christine articles before I quit.
Allocating 1 year of withdrawals into a Cash bucket (spending purposes) seems like a reasonable strategy.
Might a retiree think of the cash bucket investment (@ 4%) as one part of their overall yearly portfolio that is re-balanced yearly?
Cash (based on 1 yr needs)
Bonds & Equities (based on investors risk profile and time horizon)
If 4% is held in Cash, 96% would be held in Equity/Bonds.
Alternately:
A retiree could withdraw from their bonds monthly, quarterly, yearly and reallocate between Bonds & Equities yearly.
Bonds are typically the "less risky" assets that serve a more important role in countering the volatility of "riskier" assets in one's portfolio.
If a retiree needed a 4% SWR for spending, and the cash were to be subtracted from the bonds in a 60/40 allocated portfolio that (40% bond position), the withdrawal rate would be close to 10% (4%/40%) from the bonds. This would required a larger portion of equities to be reallocated to bonds each and every year to maintain that 60/40 allocation.
Cash (aka cash bucket strategy) typically is a "risk free" investment and is held in small amounts (compared to one's overall portfolio) for the purpose of spending.
It seems all three have a purpose in a retiree's portfolio.
I enjoy doing the research, keeping an eye out for one more new destination for the moolah, whenever the current holdings each get to 8% of the total. One of mine offers an 8% dividend. But it would be foolhardy to go chasing that for its own sake, and I'm not going to overload the portfolio with that one. (Thanks, @Catch22.) At Stocktwits, another fellow was boasting that the size of his stash in ET gives him a quarterly dividend of $5,000.00. I'll never have a portfolio of THAT size. "Prudence is a virtue."
(Starts off low and gets loud:) "Dear Prudence:"
touched onelaborated on over the years. First, we need to agree on / define what the bucket approach espouses. Many conflate this with standard portfolio allocations (% to cash, % to equities, % to bonds or commodities, etc.) As I understand it (and as the opening of the video suggests) the bucket approach is mainly about stashing a large cash stockpile in a bucket to cover anticipated near-term needs. 3-4 years' worth of cash is often used. Typically, there's a second "moderate risk" bucket (perhaps to meet needs 3-6 years out) which you wouldn't need to tap until bucket #1 is exhausted. This approach allows you to carry additional risk in your remaining buckets knowing you won't need that money soon. Additional risk should equal additional reward. I have no quarrel with that approach. Makes sense. The expectation is that during market downdrafts you can keep your hands off the riskier bucket(s) and live comfortably off the near-term / intermediate term buckets. There are no guarantees - never are in investing.I've never subscribed to that approach. The difference may be in having a defined benefit plan that pretty much covers essentials. But some of my "one-bucket" thinking relates to carrying a more conservative portfolio than I suspect most here do. Also, I try to pull larger sums for major expenses when times are good. Let it ride and rebalance when markets swoon. Again, there are no guarantees. Other than the current year's budgeted needs I don't hold a cash stash. That said, a healthy allocation to fixed income is part of the one bucket approach. Yes, doing it this way does ding you if you need to draw a large sum out during a nasty market slump. The counter to that is that during normal times you're not committing an inordinate amount of your portfolio to low yielding cash.
I suspect there's not as much difference as sometimes attributed to the two different approaches. I'd never argue my one-bucket method works better than the multi-bucket brigade does, although that seems to be the (attached video) speaker's argument. I'll add that while it sounds good in theory it would take nerves of steel to be stoically drawing down your near-term / intermediate-term bucket(s) over a 3-5 year span as your long-term bucket declined 50% in value!
Time to run the blower if I can figure out where the driveway is.