Bogleheads

[jmFightSpam]

Hi,

I have been listening to Ray Lucia's Radio Show lately. I actually find his advice around bucketizing your money making sense to me. It is not a get rich quick scheme in my mind nor a "Mad Money" type of craziness. You won't get super wealthy off of the system, but it seems like your money can grow and be used at a reasonable pace to allow you to retire comfortably.

Do the Bogleheads endorse this strategy? I was just curious.

Thanks.

[moneyman11]

Hi Jm,

Here's a thread I found that had a lot of interesting discussion about the buckets strategy.

http://diehards.org/forum/view....highlight=

[jmFightSpam]

[JDeeds]

I can't say whether or not "The Bogleheads" endorse the theory, but I do, with some changes, which I outlined in the other thread.

To me, it's simply another way to set the proper AA, but it does help me visualize it better. It'll do the job - but so will a lot of other strategies.

Sometimes (like when I'm sitting at the computer late at night), I'm tempted to dump it all into Wellington, take the distributions and go fishing.
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Jim

[mlebuf]

I have listened to Ray Lucia's show for years. I find him very knowledgeable, refreshingly honest and forthright. I also attended two of his live seminars in Phoenix and found them worthwhile too. He bases his recommendations on his own considerable personal experiences and academic research such as modern portfolio theory and empirical studies. I even heard him recommend the Bogleheads' book on his show one day. He is fan of authors such as Larry Swedroe, Bill Bernstein, Burton Malkiel, John Bogle and has mentioned their books many times.

His buckets of money strategy is a way of allocating assets so people won't panic and sell at the wrong time or get greedy and buy at the wrong time. It's basically a buy-and-hold strategy. In short, I think Ray and his brain trust put out sound financial and investment information that helps a lot of people. They are good guys.

Best wishes,
Michael
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Best wishes,
Michael

Invest your time actively and your money passively.

[bob90245]

[4th&Goal]

[Rick Ferri]

The asset allocation between stocks, bonds, and cash explains over 90% of a portfolios risk and return. The trick is to select an appropriate asset allocation and stick with it through think and thin.

If a 'buckets' explanation is an easier way for a person to understand the asset allocation process, then 'buckets of money' it is!

Rick Ferri

[pkcrafter]

I must be missing something about the bucket's strategy. First off, I agree with Rick on the ultimate importance of asset allocation and risk control.

Have I read this wrong? It looks like around year 14 that the investor is holding a near 100% equity portfolio. It appears buckets 1 and 2 are exhausted. If this is true, then the problem is obvious. That's why I must be missing something else. Can someone explain?

Paul
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[CyberBob]

[pkcrafter]

Thanks, Bob. I have not read Lucia's book, but in the link provided by Bob902, http://www.rjlwm.com/content/bomdemo.cfm it shows buckets 1 and 2 empty at one point. OK, if they really do not get to zero, what is the AA when they do get refilled?

Paul
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[bob90245]

If anyone wants to see how Lucia describes his Buckets of Money method, you can view the demo on his website:

http://www.rjlwm.com/content/bomdemo.cfm

Edit 1: I didn't see Paul's post when I started writing my post. Sorry for the repeat.

[jmFightSpam]

Good dicussion....

It sounds to me like this strategy is not totally contradictary to the Boglehead strategy. That's good. I was thinking about following it.

Now, Jim Cramer and Mad Money might be contradictary.

[CyberBob]

[pkcrafter]

Bob, I completely agree with your last post regarding unknowns. I have not read the book, so perhaps Lucia does say to replenish #1 and #2 if the market has a good run. I was just looking at Bob902's link that clearly shows 1 and 2 get depleted, and in fact that seems to be the core of the whole strategy.

Looking at it in a different way, and assuming bucket 2 is 50/50, then from the beginning in year one, the equity allocation begins to rise, assuming the market is favorable. By year 7, the portfolio consists of bucket 2 and 3, which might be a 75/25 AA. Does one maintain the 50/50 AA in bucket 2 by rebalancing? If no, then the AA is even higher.

If the market has dropped substantially, the AA will be less than 75/25. In any event, bucket 2 is moved to low risk and #3 remains all stock, which now gets you back to 66/33 or somewhere else depending on what the market did.

From this point on, the AA begins to increase again assuming smooth sailing. The point is that the strategy does not account for a sharp drawdown in that second 7 year phase, which could cost an investor a significant loss in bucket 3 while not having 7 years of income left in #1 for #3 to recover. What I'm getting at is that asset allocation could be all over the map with this strategy. That seems to violate Rule NO.1 regarding AA.

Also, Bob, this strategy was backtested, and I have to say so what. It assumes much and violates another rule—Never confuse the improbable with the impossible. The improbable being a sharp and unexpected decline at the exact wrong time. Just because it did not show up in backtested years does not mean it can't show up.

It all goes back to what Rick said about asset allocation and risk management, which this strategy seems to overlook.

If my assessment is incorrect, please correct me.

Paul
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[nisiprius]

I'm not an expert.

I'm skeptical of strategies that call for maintaining a reserve that you can use to "wait out a bear market" because I suspect them of being similar to gambling "martingales." That is, my suspicion is that they do have a high probability of working, but a small probability of failing disastrously in the hopefully rare case where the bear market just happens to last longer than the cash reserve.

It also seems to me that the strategy falls into the category of strategies that assume that "stocks are essentially riskless, in the sense of being able to deliver a known amount of money within a known time frame, as long as you're able to hold them for up to X years." Grangaard's book, which describes a somewhat similar system, seems to be saying that you get stocks to deliver a predictable return by holding them for however long it takes until they do. As soon as they do, you "reset" and start over; until they don't, you keep holding.

If you believe in "riskless stocks," you need to determine for yourself what the "essentially riskless" holding period is, do some reality checks (not forgetting the late 1960s and 1970s, even though it wasn't a Great Depression and people weren't jumping out windows), and see how the "essentially riskless" time period fits the time frame within which you'll have a need for the money.
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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

[JDeeds]

[jmFightSpam]

[CyberBob]

[pkcrafter]

Bob wrote:

[joe8d]

[leonard]

I will echo others here.

It seems unnecessarily complicated and I don't see a clear value to the complexity.

Ultimately, when you add the 3 buckets back together, you get 1 portfolio with one consolidated asset allocation. Ultimately, the buckets may be counter productive, if they take focus off the overall Debt to Equity ratio of the portfolio and thus the overall risk profile of the portfolio.

I would add the whole idea of "buckets" is to me a clear example of where an analogy goes too far. While moving money from one bucket to another may sound nice, ultimately a money is not water and it's not contained in buckets. Extending the analogy too far by focusing on a particular bucket can make lose site of the whole. It really isn't 3 "buckets", it is one financial portfolio that needs to be managed as such. IMO it should be managed as a single financial portfolio, not managed as an analogy.

This is the primary reason I hesitate to use analogies to explain financial concepts. They start to get in the way.
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Leonard

Market Timing: Do you seriously think you can predict the future? What else do the voices tell you?

If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

[nisiprius]

[4th&Goal]

This topic seems to be generating much interest. Folks are negative about "Buckets of Money" without having read the book. Read the book for a better understanding. Don't fear things because you don't understand them. Read, understand, and then argue to your heart's content.
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"I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left."
(Voltaire)

[CyberBob]

[JDeeds]

CyberBob -

One twist I have thought about is setting some ground rules that might help me stick with the plan. For instance, I don't ever intend that my Safe Investments should fall below 5 years of funding, nor do I intend that I ever fall below a 70/30 AA.

One other thought is setting an upper dollar limit to my Risky Investments. For example, if it's possible that stocks could fall up to 50% in one year and the most money I would be willing to lose - even temporarily - is $150,000, then the most I should ever have invested in stocks or other Risky Investments at one time would be $300,000. This could cause me to have many more years in Safe Investments than the original plan called for, but it would protect my gains and further, protect me in the 'doomsday' situation you described above. Of course, this would probably only happen after several boom years, but it would control any tendencies to overweight stocks in the portfolio.
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Jim

[hudson]

I've read Buckets of Money, The Grangaard Strategy, and Asset Dedication. While reading, I skimmed or skipped the authors' investment advice and focused on bucket theory...although they have different names for buckets. I'm starting on Sengupta's book today...the last of CyberBob's recommendations. Out of everything so far, the most valuable section to me is Lucia's Buckets of Money, Chapter 4. In this chapter, you work your way through the buckets, and you get to see how you can take Lucia's $300,000 example and make your own pension fund.

When I worked through Lucia's example, the final allocation was 35% stocks and 65% bonds.

I'm thinking, why couldn't I just set a 35/65 asset allocation using Boglehead theory and just withdraw 3-4% of the balance depending on the market? Isn't this CyberBob's 2-bucketeer method? I would have the advantage of being "out of the market" for up to 20 years. I could also temper high inflation or a bad market by withdrawing a constant percentage of the balance.

Quote, CyberBob:
"Bob (A 2-bucket bucketeer (ala Sengupta) who is still pondering the constant-dollar versus constant-percentage conundrum)."

Now, how to take money out of the buckets? ...Cash and Bonds first...

[Rick Ferri]

IMO, all these plans work IF they are implemented and maintained.

For most investors the Devil is in the details. Deciding on an investment strategy is easy, implementing the plan fully is a higher hurdle, and sticking to the plan for many years is extremely difficult.

Successful investing is one part strategy, two parts implementation, and fifty parts discipline.

Rick Ferri

[CyberBob]

[bob90245]

[CyberBob]

[Auld Fella]

Interesting topic. Very thoughtful contributions. I'd like to add a slightly different perspective, if I may.

First, it seems we are often our own worst enemy when it comes to investing successfully. Our brain tells us one thing, but our emotions scream another. Too often, the emotions eventually win out. That is why average market returns so often dwarf average "investor" returns.

It is THAT factor, I think, that makes this approach intriguing, because ANYTHING that can help calm our natural emotions at time like these and helps us stick to a prudent long term plan can be helpful.

And IF using 'buckets' or 'asset dedication' or 'matching assets and liabilities' or other variations on the theme helps some relax enough to keep an appropriate portion of their assets in equities rather than panicing and bailing out at the worst possible time, then there is value in it to some.

We have seen the enemy, and it is us.

This is really more about investor behavior than MPT, and it is behavior that is usually the weak link in the chain, not the theory - problems with the implementation, not the plan.

[4th&Goal]

[mlebuf]

Sometime before I started listening to Ray Lucia, I read articles by Frank Armstrong and Peter di Teresa that tell how to structure a portfolio and make withdrawals during retirement. The purpose of the plan is to reduce the odds of running out of money before we run out of time. The plan made sense to me and I've been following it for a number of years. It isn't as sophisticated as the buckets of money strategy but I like its simplicity.

Here's a link to the di Teresa article. I hope someone finds it as useful as I have:
http://news.morningstar.com/ar....x?id=80583

Best wishes,
Michael
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Best wishes,
Michael

Invest your time actively and your money passively.

[4th&Goal]

Michael, thanks for the link. Another variation of buckets for retired, or soon to retire, investors.
_________________
"I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left."
(Voltaire)

[leonard]

With the buckets or the di Teresa article, I still see the same problem if you have several down years of the stock market. In such a scenario, you would be spending your cash and short term bonds (or your bucket 1 or 2). Under such a scenario, you could be "using up" your bonds and thus gradually increasing your equity to debt ratio. So, under such a situation it appears you could be gradually making your portfolio more risky. Given that rebalancing debt/equity is the primary means we have to control risk of a portfolio, it doesn't make sense to me that someone would stop rebalancing debt/equity and spend down bonds simply to follow these strategies matter what. Seems you lose control of your primary tool for managing risk, the debt/equity ratio.
_________________
Leonard

Market Timing: Do you seriously think you can predict the future? What else do the voices tell you?

If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

[bob90245]

[CyberBob]

[jmFightSpam]

OK. I am doing an experiment with respect to Buckets of Money

I read this thread: http://diehards.org/forum/viewtopic.php?t=12880 and some of the other threads on early-retirement.org.

I even have the book.

But I am still stymied.

How do you apply the buckets of money formula to someone that is let's say 15 years from planned retirement and won't collect social security benefits for 25 years?

What is the magic formula to figure out your current buckets no matter what age you are now, how to change the buckets when you retire and change them again once you start collecting social security?

Or is the Buckets of Money strategy best for someone who is right on the cusp of retirement and those that are 10-15-20 years away should stay away from this strategy?

[mikenz]

The point of bucket or asset dedication strategies is to maintain enough short-term funds to live off for a "safe" period while your stocks grow. So if you are still accumulating you don't need buckets, although you probably want still want some bonds in your AA. I mean the whole point of Bucket #1 is for your spending, so you just wouldn't need that now.

According to the book Asset Dedication, you should be 100% stocks until very near retirement, and during retirement should only hold the exact amount of bonds you need to live off of for a given period.

[jmFightSpam]

[nisiprius]

[CyberBob]

[Rick Ferri]

CyberBob

That sounds an awful lot like classical age-based asset allocation to me.

A rose by any other name is still a rose.

Rick Ferri

[leary]

It seems to me that asset allocation and rebalancing will do about the same thing. I have a 50-50 stock-bonds index asset allocation and rebalance annually. The only thing different it seems to me is that bucketts of money only rebalances if the stock portion of a poerfolio is up. If the stock portion is down then take drawdown from bonds until the stocks recover and get all their losses back, then only rebalance with stock profits. Maybe that would be all right, I have just never done it. I rebalance annually whatever the market does.

Charles

[joe8d]

I concur with CyberBob's explanation.Simply have at retirement half your life expectancies estimated expenses going forward in conservative investments (MMF, Bond funds, etc.) and the balance in broad stock market index funds (US/ International).
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All the Best,
Joe