The Bucket Approach

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Paisley
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The Bucket Approach

Post by Paisley » Tue Jul 23, 2019 12:53 pm

I love the brain-trust knowledge base power of this site!
Along those lines...
I would love to hear your thoughts/insights on "The Bucket Approach" as a strategy to structuring an investment portfolio.
Pros?
Cons?

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Sandtrap
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Re: The Bucket Approach

Post by Sandtrap » Tue Jul 23, 2019 1:11 pm

This is a very good archive thread/post on "Christine Benz' 3-Bucket System".
Excellent input from forum members as well.
viewtopic.php?f=10&t=214843&hilit=bucket

The more you understand, then decide if it's for you or not for you.

Search the forum archives for posts by "dratkinson" on "tiers".

j
Last edited by Sandtrap on Tue Jul 23, 2019 2:50 pm, edited 2 times in total.
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delamer
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Re: The Bucket Approach

Post by delamer » Tue Jul 23, 2019 2:07 pm

If it works for you, then use it.

For many people, the core appeal is having assets set aside in cash equivalents to cover a few years of expenses. If having that cushion would prevent you from panicking and selling stocks in a downturn, then it is valuable.

The bucket system is another way to determine your asset allocation. It just uses dollar amounts (expressed as years of expenses) instead of percentages.

You also could investigate liability matching portfolios.

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bobcat2
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Re: The Bucket Approach

Post by bobcat2 » Tue Jul 23, 2019 2:21 pm

The so called logic of the bucket approach is that 1-2 years of cash from your portfolio allows you to sleep well and hopefully not sell in a panic. Stocks are volatile, but will typically grow if given enough time, such as 10 years.

In actuality you are simply trading off one set of risks for another. If stocks don't recover within 8-10 years you are stuck with an all equity portfolio that has shrunk, which is a worse situation than the situation the buckets have avoided. Here is Moshe Milevsky elaborating on this point.
A bear market early in retirement – i.e. when you start withdrawing money from a portfolio -- can have a devastating impact on the sustainability of your income stream. ...

Some commentators have expressed the view that by placing a few years worth of retirement income needs into safe investments and not touching the remaining funds in the event of a bear market, they can somehow avoid the ruinous impact of a poor sequence of investments returns. A fringe element of this sect believes that if markets decline a retiree should simply be counseled to only take income from their bond allocation and then “wait for the stock allocation to recover” and thus avoid selling at a loss. These strategies are an optical illusion at best and create a potential for grave disappointment at worst. ...

In sum, my only point is as follows. If you decide to adopt the so-called buckets approach to retirement income planning then beware of the fact that your total asset allocation and implicit exposure to equity will fluctuate unpredictably over time. Moreover, if indeed you experience a poor initial sequence of investment returns – so that you have been forced to liquidate all your cash investment -- you might find yourself with a 100% equity exposure well into retirement and possibly deep into a bear market. This is in contrast to the non-bucketer (ok, lousy word) who is maintaining the same exact asset mix and hence the same risk profile over time. Sure, the market may recover by the time you have to tap in to the equity portion – or it may not. Either way, you have neither reduced nor mitigated financial risk but simply taken a bet on scenarios you believe will not happen. Safety is just a mirage.
Example - The 10 year Total Wilshire 5000 real return with dividends reinvested was -23.7% from the end of 1999 thru 2009.
Link to full article -https://www.thinkadvisor.com/2007/06/01 ... 0623151217

The bucket approach is more complicated than the conventional approach of retirement planning - rebalancing blah blah blah, but it is not less risky. It simply shifts the risk profile. If the bear market recovers in 5 years or less you are better off using buckets, but in the really bad case of a bear market lasting 9 years or more, the bucket approach makes a very bad situation worse. If you want less risk, you have to do some form of liability matching for at least for a portion of your retirement income.

Here's a link to a recent paper on the bucket strategy. The title is telling -
The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?
https://poseidon01.ssrn.com/delivery.ph ... 13&EXT=pdf

BobK
Last edited by bobcat2 on Tue Jul 23, 2019 2:31 pm, edited 1 time in total.
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: The Bucket Approach

Post by Ferdinand2014 » Tue Jul 23, 2019 2:25 pm

https://poseidon01.ssrn.com/delivery.ph ... 25&EXT=pdf

Study outlining why a bucket system may not be ideal. Basically with a bucket system you only rebalance in one direction - that is to say, sell when equities are up and never buy when equities are down, which causes you to miss out on the buy low sell high concept.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Re: The Bucket Approach

Post by willthrill81 » Tue Jul 23, 2019 2:29 pm

Mathematically, it's likely to underperform a traditional 'AA' approach.

But if it enables you to not panic, then it may be a good idea for you. People are rarely criticized here for dialing back their stock allocation because they aren't emotionally comfortable with the volatility, so I don't see using a bucket approach because it's more emotionally stabilizing for you than an 'AA' approach as being much different.

If employing a bucket approach enables you to have a higher stock allocation than you would otherwise, it might actually work out better for you.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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WoodSpinner
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Re: The Bucket Approach

Post by WoodSpinner » Tue Jul 23, 2019 2:45 pm

delamer wrote:
Tue Jul 23, 2019 2:07 pm
If it works for you, then use it.

For many people, the core appeal is having assets set aside in cash equivalents to cover a few years of expenses. If having that cushion would prevent you from panicking and selling stocks in a downturn, then it is valuable.

The bucket system is another way to determine your asset allocation. It just uses dollar amounts (expressed as years of expenses) instead of percentages.

You also could investigate liability matching portfolios.
I am a fan, but have modified it to suit my needs and address some of the shortcomings outlined above.

Take a look at this Post for some of the highlights.

It’s an approach that I understand, can live with and can explain to my wife and daughter.

Using Buckets 1&2 to match my liabilities for a rolling 10 years also helps me build an effective bond ladder which roughly matches the durations I need while using a number of inexpensive ETF funds. Second Delamar’s point on it helping determine a target Asset Allocation. Not the only input, but a very good start.

WoodSpinner

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willthrill81
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Re: The Bucket Approach

Post by willthrill81 » Tue Jul 23, 2019 2:51 pm

I do think that it's worth pointing out that unless you're going to have a dynamic, as opposed to static, AA in retirement, there's literally no difference whatsoever in the results of a bucket approach and an 'AA' approach.

If you're going to have a dynamic AA, you need to have a very thorough plan for how you are going to 'empty' and 'refill' your buckets. How will you determine when to draw down from your bonds or cash, for instance? When you replenish them? These are important details that can have a significant impact on your results. Many who employ the bucket approach are just 'winging it' through this process, and that's very problematic. We would never tell someone in the accumulation phase to just 'wing it'. On the contrary, we advocate that everyone have an investor policy statement (IPS), and it's my firm belief that, whatever your withdrawal strategy is, you have a withdrawal policy statement (WPS) as well, but especially so with the bucket approach due to the numerous details involved.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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WoodSpinner
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Re: The Bucket Approach

Post by WoodSpinner » Tue Jul 23, 2019 3:07 pm

willthrill81 wrote:
Tue Jul 23, 2019 2:51 pm
I do think that it's worth pointing out that unless you're going to have a dynamic, as opposed to static, AA in retirement, there's literally no difference whatsoever in the results of a bucket approach and an 'AA' approach.

If you're going to have a dynamic AA, you need to have a very thorough plan for how you are going to 'empty' and 'refill' your buckets. How will you determine when to draw down from your bonds or cash, for instance? When you replenish them? These are important details that can have a significant impact on your results. Many who employ the bucket approach are just 'winging it' through this process, and that's very problematic. We would never tell someone in the accumulation phase to just 'wing it'. On the contrary, we advocate that everyone have an investor policy statement (IPS), and it's my firm belief that, whatever your withdrawal strategy is, you have a withdrawal policy statement (WPS) as well, but especially so with the bucket approach due to the numerous details involved.
Agreed....

I have a detailed IPS and Retirement Policy Statement (RPS) as well. Reading, posting and learning from the forum has been invaluable.

WoodSpinner

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Re: The Bucket Approach

Post by cashboy » Tue Jul 23, 2019 3:56 pm

to bucket, or not to bucket, that is the question:
whether 'tis nobler in the mind to suffer
the task of filling and emptying one's buckets,
or to go bucket-less against a financial sea of troubles....

in general, me thinks the bucket approach being good or bad, or useful or not (with or without variations for the individual), depends upon where one is on their financial management expertise journey.

BH contains some members that are extremely skilled in areas of financial management.
:happy
for them, they suggest go bucket-less

BH contains some members that are not extremely skilled in areas of financial management, and are learning along the way.
:confused
for them, buckets might provide a structure to start with - something they can understand from where they are in their financial management expertise journey (and then they can modify it and/or go their own way as time passes).
Three-Fund Portfolio: FSPSX - FXAIX - FXNAX (with slight tilt of CDs - CASH - Canned Beans - Rice - Bottled Water)

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Paisley
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Re: The Bucket Approach

Post by Paisley » Tue Jul 23, 2019 4:22 pm

Here is a corollary question:
As I currently understand this approach, a primary factor behind the bucket approach is time. Could the bucket approach be modified by adding in "goal-specific risk tolerance" as well? In other words, if there is a goal with a time horizon of say 5 years, but that goal is to fund a hobby (buy a new sailboat) then the risk allocation for that goal is likely to be higher than if that of a 5 year goal to have saved up a certain amount of money for potential medical expenses, or upcoming necessary home repairs.

Is there a "goal-risk-adjusted" bucket approach that exists?

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Re: The Bucket Approach

Post by livesoft » Tue Jul 23, 2019 4:43 pm

Not for me. If I need to buy a sailboat, I buy a sailboat. If stocks are down, then I'm selling bond fund shares to buy more stock fund shares. If stocks are up, then I'm selling stock fund shares to buy more bond funds shares. If I need sailboat, too, then I sell anything to buy a sailboat and rebalance to get back to my asset allocation.
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Re: The Bucket Approach

Post by jebmke » Tue Jul 23, 2019 4:49 pm

Bucket strategies seem too complicated for me. Seems like too many moving parts and some chance of wrong-footing and ending up with a risk profile that was unintended. I am looking for more ways to simplify rather than complicate.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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willthrill81
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Re: The Bucket Approach

Post by willthrill81 » Tue Jul 23, 2019 5:01 pm

jebmke wrote:
Tue Jul 23, 2019 4:49 pm
Bucket strategies seem too complicated for me. Seems like too many moving parts and some chance of wrong-footing and ending up with a risk profile that was unintended. I am looking for more ways to simplify rather than complicate.
Compared to an 'AA approach', bucket strategies are more complicated, more likely to lead to behavioral errors, and likely to result in less terminal wealth. About the only thing they may have going for them is that they some people seem to prefer them for emotional reasons.

However, I've seen some here implement a sort of quasi-bucket-AA-hybrid approach. One example are retirees who will sell stocks to buy bonds but will not sell bonds to buy stocks, sometimes for a stated fear of 'rebalancing into oblivion', which is one of the frequently stated concerns of adherents of the bucket approach. This may significantly change the risk that retirees face. Failure to rebalance from bonds into stocks would have hurt retirees going through the 2008-2009 market decline, but it would obviously help them if stocks went down and didn't recover for an extended period of time.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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GerryL
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Re: The Bucket Approach

Post by GerryL » Tue Jul 23, 2019 5:11 pm

cashboy wrote:
Tue Jul 23, 2019 3:56 pm
to bucket, or not to bucket, that is the question:
whether 'tis nobler in the mind to suffer
the task of filling and emptying one's buckets,
or to go bucket-less against a financial sea of troubles....

in general, me thinks the bucket approach being good or bad, or useful or not (with or without variations for the individual), depends upon where one is on their financial management expertise journey.

BH contains some members that are extremely skilled in areas of financial management.
:happy
for them, they suggest go bucket-less

BH contains some members that are not extremely skilled in areas of financial management, and are learning along the way.
:confused
for them, buckets might provide a structure to start with - something they can understand from where they are in their financial management expertise journey (and then they can modify it and/or go their own way as time passes).
Because what I have read about the Bucket Strategy seems too complicated, I have come up with my own single-bucket strategy.
I have a cash bucket that is continuously fed by SS, RMDs and taxable dividends.
I have a 60/40 portfolio.
Cash goes in the bucket; everything else is in the investment portfolio.
If my cash bucket should get too low (hasn't happened yet), I can choose to sell off something in the portfolio.
If my cash bucket gets too full, I can reinvest the overflow into my taxable account.
One bucket is all I need as long as I understand and stick to my spending target.

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quisp65
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Re: The Bucket Approach

Post by quisp65 » Tue Jul 23, 2019 5:16 pm

Maybe I'm going bucket approach. I'm not really thinking percent allocation but number of years and what's ahead. Is it a bucket strat?

1 year expenses + EF in short term bonds
7-10 years in CDs
The rest in VTSAX

I'll one way balance into CDs during market highs and maybe consider it a raise if I get more than 10 years of income.

I'm a bit on the risky side but I believe I got a safe 7 figure inheritance in about 7-15 years.
Last edited by quisp65 on Wed Jul 24, 2019 5:41 am, edited 2 times in total.
Plan: 75/25 stock index/cash investments, one-way balance market highs, 3.2% withdrawal rate at 54, can lower expenses easily by 1/3rd

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Re: The Bucket Approach

Post by jebmke » Tue Jul 23, 2019 5:16 pm

willthrill81 wrote:
Tue Jul 23, 2019 5:01 pm
One example are retirees who will sell stocks to buy bonds but will not sell bonds to buy stocks,
Now that I am out of carry-over losses from 2009 I am actually doing the opposite. But I am starting from a 40/60 allocation. I don't plan to sell stock ever again.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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quisp65
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Re: The Bucket Approach

Post by quisp65 » Tue Jul 23, 2019 5:39 pm

willthrill81 wrote:
Tue Jul 23, 2019 5:01 pm
jebmke wrote:
Tue Jul 23, 2019 4:49 pm
Bucket strategies seem too complicated for me. Seems like too many moving parts and some chance of wrong-footing and ending up with a risk profile that was unintended. I am looking for more ways to simplify rather than complicate.
Compared to an 'AA approach', bucket strategies are more complicated, more likely to lead to behavioral errors, and likely to result in less terminal wealth. About the only thing they may have going for them is that they some people seem to prefer them for emotional reasons.

However, I've seen some here implement a sort of quasi-bucket-AA-hybrid approach. One example are retirees who will sell stocks to buy bonds but will not sell bonds to buy stocks, sometimes for a stated fear of 'rebalancing into oblivion', which is one of the frequently stated concerns of adherents of the bucket approach. This may significantly change the risk that retirees face. Failure to rebalance from bonds into stocks would have hurt retirees going through the 2008-2009 market decline, but it would obviously help them if stocks went down and didn't recover for an extended period of time.
I'm doing one way balance and my rationalization is I feel I can be more aggressive and have more equity and thus gain more wealth. In other words...what would you make you more wealthy? Two way balance with a conservative allocation or equity increased just to the point where you no longer felt safe doing a two way balance and balanced one way into your fixed income. I'm thinking a larger pile of equity with one way balance would make me wealthier rather than the conventional way of doing it with a more conservative allocation.
Plan: 75/25 stock index/cash investments, one-way balance market highs, 3.2% withdrawal rate at 54, can lower expenses easily by 1/3rd

Nowizard
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Re: The Bucket Approach

Post by Nowizard » Tue Jul 23, 2019 5:48 pm

To me, a key is devising a method and conceptual structure that works for you, whether in financial or other decisions. There are those who love to follow leaders in sports, others who love underdogs. In finance, there are no absolutes, but it is important to choose an approach that fits the "Sane Man" theory that answers "Yes" to the question "Could a sane man/woman come up with this approach?" Other than that, you have choices that meet your particular needs. This forum will provide much information to guide you, but the choices are yours. Some follow suggestions exactly as they find a particular poster or strategy appealing, others follow much, but not all of the suggestions. The ones that are likely in difficulty are outliers who reject all the knowledge of posters who vary in knowledge from extensive to reasonably astute. Good luck to you with whatever you choose. Christine Benz approves of the Bucket Method, many here who are very knowledgeable will not.

Tim

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Re: The Bucket Approach

Post by Broken Man 1999 » Tue Jul 23, 2019 5:56 pm

I think for OUR portfolio, a bucket approach adds complexity, at the time I am actively seeking simplicity.

I would rather have ONE portfolio, with no assets reserved for this length of time, or that length of time, or this expense or that expense. And, I don't need to have much of a cash holding, as I see our entire portfolio supporting us in the long view. I generate cash when needed. And I try to hold only the amount of cash I need to cover our expenses in the first couple of weeks of each month. The third Wednesday of each month brings our SS benefit deposits, enough to finish out the rest of the monthly expenses. We repeat the cycle over and over.

One advantage of having only 5-6 MFs/ETFs in our portfolio is it is a very simple matter to determine if/where one should sell the funds/redirect dividends to cash instead of reinvesting to generate the cash to pay expenses.

After 48 years of marriage, DW and I pretty much know how to run the household without elaborate (IMHO) methods to do the one simple task of keeping the bills paid. The task we have been able to accomplish for 48 years did not get more complex, or onerous in retirement. In fact, with the exception of WHERE the money comes from, our working habits serve us quite nicely in retirement.

And, since we have such a limited number of different MFs and ETFs, the selection process is pretty darn easy.

Those who desire more complexity, or want to have their large holding of cash, or buckets, good for them. I honestly see no value in such a method.

To each their own. Whatever works best should be what a person chooses. Very personal preference.

Broken Man 1999
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Re: The Bucket Approach

Post by H-Town » Tue Jul 23, 2019 6:00 pm

Paisley wrote:
Tue Jul 23, 2019 12:53 pm
I love the brain-trust knowledge base power of this site!
Along those lines...
I would love to hear your thoughts/insights on "The Bucket Approach" as a strategy to structuring an investment portfolio.
Pros?
Cons?
I found out that there are 2 types of people in this world: one thinks buckets and one doesn't. I manage our wealth as one portfolio while my wife thinks different buckets.

Bucket strategy is a selling point of financial advisors to the second group that likes buckets. It's just not for me.

dbr
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Re: The Bucket Approach

Post by dbr » Tue Jul 23, 2019 6:04 pm

I probably line up with livesoft though I don't know I would go so far as to use that language -- or maybe I would.

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Steve Reading
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Re: The Bucket Approach

Post by Steve Reading » Tue Jul 23, 2019 6:55 pm

All a bucket-approach is is a dynamic asset allocation based on market conditions. If stocks are down, you increase your stock % allocation ("only sell bonds/use cash"). Once stocks go back up, decrease the stock % allocation ("fill the buckets up").

If you recommend buckets for beginners but would advice against tactical asset allocation changes based on what's occurring in the market, then I believe you are being inconsistent.

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Re: The Bucket Approach

Post by willthrill81 » Tue Jul 23, 2019 7:24 pm

305pelusa wrote:
Tue Jul 23, 2019 6:55 pm
If you recommend buckets for beginners but would advice against tactical asset allocation changes based on what's occurring in the market, then I believe you are being inconsistent.
A bucket strategy is not necessarily a dynamic AA approach, but in the way most think about it, it is. But yes, TAA and this form of bucket strategy are strongly related.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Steve Reading
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Re: The Bucket Approach

Post by Steve Reading » Tue Jul 23, 2019 7:51 pm

willthrill81 wrote:
Tue Jul 23, 2019 7:24 pm
305pelusa wrote:
Tue Jul 23, 2019 6:55 pm
If you recommend buckets for beginners but would advice against tactical asset allocation changes based on what's occurring in the market, then I believe you are being inconsistent.
A bucket strategy is not necessarily a dynamic AA approach, but in the way most think about it, it is. But yes, TAA and this form of bucket strategy are strongly related.
Could you give me an example of a bucket strategy that you do not consider to be a form of dynamic AA?

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willthrill81
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Re: The Bucket Approach

Post by willthrill81 » Tue Jul 23, 2019 7:55 pm

305pelusa wrote:
Tue Jul 23, 2019 7:51 pm
willthrill81 wrote:
Tue Jul 23, 2019 7:24 pm
305pelusa wrote:
Tue Jul 23, 2019 6:55 pm
If you recommend buckets for beginners but would advice against tactical asset allocation changes based on what's occurring in the market, then I believe you are being inconsistent.
A bucket strategy is not necessarily a dynamic AA approach, but in the way most think about it, it is. But yes, TAA and this form of bucket strategy are strongly related.
Could you give me an example of a bucket strategy that you do not consider to be a form of dynamic AA?
Michael Kitces did an analysis of one in this post.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Steve Reading
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Re: The Bucket Approach

Post by Steve Reading » Tue Jul 23, 2019 8:06 pm

willthrill81 wrote:
Tue Jul 23, 2019 7:55 pm
305pelusa wrote:
Tue Jul 23, 2019 7:51 pm
willthrill81 wrote:
Tue Jul 23, 2019 7:24 pm
305pelusa wrote:
Tue Jul 23, 2019 6:55 pm
If you recommend buckets for beginners but would advice against tactical asset allocation changes based on what's occurring in the market, then I believe you are being inconsistent.
A bucket strategy is not necessarily a dynamic AA approach, but in the way most think about it, it is. But yes, TAA and this form of bucket strategy are strongly related.
Could you give me an example of a bucket strategy that you do not consider to be a form of dynamic AA?
Michael Kitces did an analysis of one in this post.
That just proves my point. A bucket strategy that maintains a static AA (by rebalancing) is identical to a simple static AA strategy. In order to be different, you'd need to purposefully avoid rebalancing, at which point it would not be a static AA plan; it would be a dynamic one.

Perhaps I'm not following your point?

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willthrill81
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Re: The Bucket Approach

Post by willthrill81 » Tue Jul 23, 2019 11:06 pm

305pelusa wrote:
Tue Jul 23, 2019 8:06 pm
willthrill81 wrote:
Tue Jul 23, 2019 7:55 pm
305pelusa wrote:
Tue Jul 23, 2019 7:51 pm
willthrill81 wrote:
Tue Jul 23, 2019 7:24 pm
305pelusa wrote:
Tue Jul 23, 2019 6:55 pm
If you recommend buckets for beginners but would advice against tactical asset allocation changes based on what's occurring in the market, then I believe you are being inconsistent.
A bucket strategy is not necessarily a dynamic AA approach, but in the way most think about it, it is. But yes, TAA and this form of bucket strategy are strongly related.
Could you give me an example of a bucket strategy that you do not consider to be a form of dynamic AA?
Michael Kitces did an analysis of one in this post.
That just proves my point. A bucket strategy that maintains a static AA (by rebalancing) is identical to a simple static AA strategy. In order to be different, you'd need to purposefully avoid rebalancing, at which point it would not be a static AA plan; it would be a dynamic one.

Perhaps I'm not following your point?
Only that a bucket strategy is no different from a static AA unless you implement a dynamic AA.
Last edited by willthrill81 on Wed Jul 24, 2019 12:12 am, edited 1 time in total.
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Re: The Bucket Approach

Post by klaus14 » Wed Jul 24, 2019 12:52 am

Bucket Approach can just be a way to frame the asset allocation. For example:

15% to cover 4 years of expenses: Short Term Bonds (Investment grade + tips)
15% to cover next 4 years: Intermediate Term Bonds (Investment grade + tips)
70% for long term: 10% gold, 10% Long Term Bonds, 50% Stocks.

This is Equivalent to
40% Total Bond Market + TIPS
10% Gold
50% Stocks

However, first version can give more confidence to the retiree.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds.

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 7:58 am

Maybe what I am asking about is a little different than the bucket approach:
Here is framework I am thinking about:

1. Goal-specific AA = function of goal-adusted risk + time

2. Goal-specific amount (take retirement spending as an
example) =
a. current spending FV using inflation for growth rate
(exclude mtge etc.)
b. FV × 25 (or other SWR)
c. PV using goal AA expected growth % for discount rate
factoring in additional investing if applicable

2. Portfolio total = sum of goal PVs

3. Portfolio AA = sum of individual goal AA to FI ÷
portfolio total

4. Portfolio rebalancing = function of goal-specific
glidepaths

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Re: The Bucket Approach

Post by marcopolo » Wed Jul 24, 2019 8:10 am

klaus14 wrote:
Wed Jul 24, 2019 12:52 am
Bucket Approach can just be a way to frame the asset allocation. For example:

15% to cover 4 years of expenses: Short Term Bonds (Investment grade + tips)
15% to cover next 4 years: Intermediate Term Bonds (Investment grade + tips)
70% for long term: 10% gold, 10% Long Term Bonds, 50% Stocks.

This is Equivalent to
40% Total Bond Market + TIPS
10% Gold
50% Stocks

However, first version can give more confidence to the retiree.
That is fine as a starting point, but where I think bucket approaches fall apart is when it comes to re-filling the buckets.

It seems most people approach the re-filling problem in one of two ways.

1) Keep the same allocations and move money from longest bucket forward to shortest bucket at some fixed interval. This essentially amounts to the same as fixed allocation, a lot of unnecessary mental accounting.

2) Re-fill buckets opportunistically; spend from short term bucket when markets are "down", refill them when markets are "up'. Now you are getting into tactical asset allocation, or outright market timing. The history of that being done successfully at an individual level is not very encouraging.

So, it seems bucketing either does nothing at the cost of added complexity, or forces one to make timing bets. Neither seem very appealing to me.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 8:32 am

I dont understand what you mean by timing "bets."
Arent the adjustments just a function of several glidepaths? No different than how Vanguard, among others, adjust target date fund asset allocations, right?

earlyout
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Re: The Bucket Approach

Post by earlyout » Wed Jul 24, 2019 8:37 am

GerryL wrote:
Tue Jul 23, 2019 5:11 pm
cashboy wrote:
Tue Jul 23, 2019 3:56 pm
to bucket, or not to bucket, that is the question:
whether 'tis nobler in the mind to suffer
the task of filling and emptying one's buckets,
or to go bucket-less against a financial sea of troubles....

in general, me thinks the bucket approach being good or bad, or useful or not (with or without variations for the individual), depends upon where one is on their financial management expertise journey.

BH contains some members that are extremely skilled in areas of financial management.
:happy
for them, they suggest go bucket-less

BH contains some members that are not extremely skilled in areas of financial management, and are learning along the way.
:confused
for them, buckets might provide a structure to start with - something they can understand from where they are in their financial management expertise journey (and then they can modify it and/or go their own way as time passes).
Because what I have read about the Bucket Strategy seems too complicated, I have come up with my own single-bucket strategy.
I have a cash bucket that is continuously fed by SS, RMDs and taxable dividends.
I have a 60/40 portfolio.
Cash goes in the bucket; everything else is in the investment portfolio.
If my cash bucket should get too low (hasn't happened yet), I can choose to sell off something in the portfolio.
If my cash bucket gets too full, I can reinvest the overflow into my taxable account.
One bucket is all I need as long as I understand and stick to my spending target.
And another word for my bucket is my checking account!

marcopolo
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Re: The Bucket Approach

Post by marcopolo » Wed Jul 24, 2019 8:39 am

Paisley wrote:
Wed Jul 24, 2019 8:32 am
I dont understand what you mean by timing "bets."
Arent the adjustments just a function of several glidepaths? No different than how Vanguard, among others, adjust target date fund asset allocations, right?
You will always have goals for your money that are on different timelines. If you allocate buckets to them, how will you refill the short term ones as you spend them down?

1) Periodically, based a fixed schedule, with possibly a glide path. This just reduces down to an asset allocation strategy, but with more mental accounting.

2) Opportunistically, i.e., when markets are good, and your longer term buckets are overflowing. This is where the timing bets come in.
Once in a while you get shown the light, in the strangest of places if you look at it right.

aristotelian
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Re: The Bucket Approach

Post by aristotelian » Wed Jul 24, 2019 9:02 am

At some point, you need to refill the cash bucket, which inevitably means drawing on stocks and bonds. The net effect, it seems to me, is simply having a large cash allocation most of the time that is out of market and losing value to inflation. Over time, I would expect a fully invested portfolio to earn more return over time that will give you a bigger cushion. Consider TIPS instead of cash if you want a third asset class.

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 9:07 am

an appropriate cash bucket should not be funded by cash at the beginning - that makes no sense

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 9:12 am

A bucket approach needs to have common sense in terms of risk. No one is going to allocate a 6 month cash reserve for retirement by allocating a 6 month cash reserve today if they are retiring 30 years from now. In the end it a bucket portfolio might look identical to a global AA portfolio, at least early on. But there are some goals with clear horizons require distinct AAs that buckets will capture.

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 9:31 am

Ultimately, the bucket approach is akin bank to asset liability management / interest rate risk management. Among other things, banks incorporate credit risk, liquidity risk and interest rate risk (duration). This approach is essentially same except that it considers market risk (volatility) as a primary driver.

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 9:55 am

Banks measure economic value of equity (pv assets - pv liabilities using non-parallel interest rate shift / effective duration assumptions) so too the glide path is akin to a non-parallel interest rate shift. In this case, σ is now used in combination with IRR as opposed to banks primarily relying on IRR.
Does this comparison make sense?

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quisp65
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Re: The Bucket Approach

Post by quisp65 » Wed Jul 24, 2019 9:57 am

I want to reiterate. A person that wants to play it risky and obtain the most wealth could beat the other methods by following a simple bucket strat.
If 100% equity is too risky, one would create a fixed income bucket to last the typical bear market. Given the S&P hit a high about every 7 years and equity has always beaten bonds. This bucket strat below would have beaten everyone else's strat since 1949. I'm being bold for the purpose to motivate someone to challenge it. Of course things may change in the future and this would be too risky depending on a person circumstances, but maybe Ok for someone that has a backup or willing to take the risk.


7-10 years fixed income
The rest in equity and one way balance into fixed income during market highs to 7-10 years of expenses

Example of S&P high at least every 7 years:
https://en.wikipedia.org/wiki/Closing_m ... _S%26P_500
Plan: 75/25 stock index/cash investments, one-way balance market highs, 3.2% withdrawal rate at 54, can lower expenses easily by 1/3rd

jj45
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Re: The Bucket Approach

Post by jj45 » Wed Jul 24, 2019 10:08 am

[quoted post removed by admin LadyGeek]

[Comments removed by admin LadyGeek]

With all of our mathematical gymnastics and Monte Carlo simulations we still need to make a subjective choice: asset allocation. How do you choose your asset allocation? As many have written over many threads over many years, buckets are no different than asset allocation. You can make them both fixed or dynamic, but one can always be translated to another. It seems the only difference is the units used, asset allocation is framed in terms of %, and buckets are framed in terms of years. The mathematically adept can easily convert back and forth. Choosing an asset allocation involves risk tolerance and comfort and fear and describing it in terms of years is, for those with less mathematical understanding [OT comment removed by admin LadyGeek], easier to emotionally understand than %.

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 10:20 am

bank alm exists for a reason - its nothing more than a risk arbitrage and it uses primarily duration, liquidity and credit risk in the arbitrage

the bucket approach is a risk arbitrage and it uses primarily duration and volatility risk in the arbitrage

portfolio arbitrage:
σ risk = replacement ratio risk + inflation risk

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 10:24 am

despite all the problems and fallout from the economic crisis, nothing has changed (or was even up for grabs) in terms of fundamental mathematics for bank alm - the reason? it is the only way to do it and it actually works

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 10:41 am

All banks risk-adjusted balance sheet and income statement
The bucket approach incorporates a risk-adjusted household balance sheet and income statement
You could equate the loan loss reserve to a spending cushion
You could equate the capital ratios to the SWR

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 10:48 am

risk tolerance assessment = underwriting

Independent George
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Re: The Bucket Approach

Post by Independent George » Wed Jul 24, 2019 2:42 pm

I think the main benefit of the bucket approach is that it's a means of behavioral hacking for people who don't think in terms of AA and rebalancing. I think the big drawback is that it really doesn't mitigate risks in a meaningful way, and it's actually way more complicated than just sticking to your AA. It's good for people who already organize their assets into mental buckets; the average person on this board can break down their entire net worth on demand, and has no need for it.

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 3:31 pm

Thank you everyone!!!!!!

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Paisley
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Re: The Bucket Approach

Post by Paisley » Wed Jul 24, 2019 4:36 pm

Taking portfolio construction down to goal level risk and fleshing out AA at the goal level, considering various time horizons seems like a ton of work.
Are there any financial advisory firms out there who are actually offering a true goal-level-risk-adjusted portfolio construction? Does someone have to be a millionaire for that kind of service?

downshiftme
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Re: The Bucket Approach

Post by downshiftme » Wed Jul 24, 2019 5:00 pm

could beat the other methods by following a simple bucket strat.
Sorry, this is not true. In hindsight if you very fortuitously refilled your various buckets by selling just before bear markets and riding out those poor markets using a fixed asset bucket until your equity based buckets recover, then sure you can do well. We have advisers around here pushing these strategies hard using the arguments that the buckets allow you more than 4% SWR because of the time allowed for the equity bucket(s) to grow. But the customers generally don't notice the market timing nature of moving money from bucket to bucket that makes the comparisons invalid. Unless your market timing is impeccable, bucket strategies operate a lot like asset allocation strategies with very large rebalancing bands. Taking more than the usual SWR because of some belief in bucket superiority (plus maybe adviser fees) can lead to portfolio failure if markets are significantly down when the day comes to replenish the fixed asset buckets.

H-Town
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Re: The Bucket Approach

Post by H-Town » Wed Jul 24, 2019 5:17 pm

Independent George wrote:
Wed Jul 24, 2019 2:42 pm
I think the main benefit of the bucket approach is that it's a means of behavioral hacking for people who don't think in terms of AA and rebalancing. I think the big drawback is that it really doesn't mitigate risks in a meaningful way, and it's actually way more complicated than just sticking to your AA. It's good for people who already organize their assets into mental buckets; the average person on this board can break down their entire net worth on demand, and has no need for it.
How should an average investor determine their appropriate AA? Where do they start? Is it an arbitrary 60/40, 70/30? Is it a tried and true glide path from Targeted Date retirement funds? How does one know the perfect AA and stick to it?

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