My 3 buckets: 1 yr cash + 2 yr bond + stocks

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JSnyder
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My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by JSnyder » Fri Nov 29, 2019 8:45 pm

I was discussing this topic with a friend today. I might be walking well-tread ground but I guess many topics are recycled here.

Anyway I have 3 buckets

1 year of living expenses in cash (actually Vanguard Short Term Corporate Bonds which I consider cash equivalent)

2 year bonds. Specifically Vanguard Total U.S. Bond Index

The rest in stocks. Mostly Vanguard index but I have some Primecap and Capital Opportunity. I consider these seasoning to my core holdings.

Why 3 buckets? Because historically over the last 100 years my understanding is the longest bear market (down 20 %) has been 2.8 years.

So lets assume a perfect storm: bear market and my wife and I lose our jobs (we are getting older but still working). My first move would be to pare down our living expenses to needs vs wants. I would then consume the Vanguard Short Term Corporate Bond Fund. If the market has not improved I would then consume my Vanguard Total U.S. Bond Index.

Hopefully (historically speaking) by the time both of these funds are depleted the U.S. stock market will have recovered. At this point I can re-create my cash and bond buckets by selling stocks.

Where do you errors in my analysis and strategy? Roast me (well not really).

AlohaJoe
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by AlohaJoe » Fri Nov 29, 2019 8:50 pm

JSnyder wrote:
Fri Nov 29, 2019 8:45 pm
Because historically over the last 100 years my understanding is the longest bear market (down 20 %) has been 2.8 years.
You could just Google this and learn that you are wrong.
The longest was a 61-month bear that ended in March 1942 and cut the index by 60 percent

delamer
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by delamer » Fri Nov 29, 2019 8:52 pm

How many years of expenses do you have saved in total?

And how close to retirement are you?

Ferdinand2014
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Ferdinand2014 » Fri Nov 29, 2019 8:57 pm

"The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?"

Abstract:

"A bucket approach, which broadly consists of parking a few years of annual withdrawals safely in cash and investing the rest of the portfolio more aggressively, is a popular strategy often recommended by financial planners and typically embraced by retirees. Although this strategy is not devoid of merit, the comprehensive evidence discussed here, from 21 countries over a 115-year period, questions its effectiveness. In fact, simple static strategies, which by definition involve periodic rebalancing, clearly outperform bucket strategies, and they do so based not just on one but on four different ways of assessing performance."


https://blog.iese.edu/jestrada/files/20 ... proach.pdf
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

Cash
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Cash » Fri Nov 29, 2019 9:27 pm

Ferdinand2014 wrote:
Fri Nov 29, 2019 8:57 pm
"The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?"

Abstract:

"A bucket approach, which broadly consists of parking a few years of annual withdrawals safely in cash and investing the rest of the portfolio more aggressively, is a popular strategy often recommended by financial planners and typically embraced by retirees. Although this strategy is not devoid of merit, the comprehensive evidence discussed here, from 21 countries over a 115-year period, questions its effectiveness. In fact, simple static strategies, which by definition involve periodic rebalancing, clearly outperform bucket strategies, and they do so based not just on one but on four different ways of assessing performance."


https://blog.iese.edu/jestrada/files/20 ... proach.pdf
I don’t think this is quite on point. The OP is not talking about using buckets as a retirement drawdown strategy. Instead, he is in the accumulation phase and is basically trying to figure out his allocation to less risky assets. I also prefer to have a year or so of living expenses in cash and to let the rest ride in equities.

yogesh
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by yogesh » Fri Nov 29, 2019 10:02 pm

OP - That is fine approach for accumulation.
At some point 3rd bucket will be too large given first two buckets are fixed amount and you might find it uneasy.

You propose:
Cash ($)
Bond ($)
Stock (Rest)

Most here use:
Cash ($)
Bond x%
Stock (100-x%)
Emergency: FDIC | Taxable: VTMFX | Retirement: TR2040

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dmcmahon
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by dmcmahon » Fri Nov 29, 2019 10:04 pm

Ferdinand2014 wrote:
Fri Nov 29, 2019 8:57 pm
"The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?"

Abstract:

"A bucket approach, which broadly consists of parking a few years of annual withdrawals safely in cash and investing the rest of the portfolio more aggressively, is a popular strategy often recommended by financial planners and typically embraced by retirees. Although this strategy is not devoid of merit, the comprehensive evidence discussed here, from 21 countries over a 115-year period, questions its effectiveness. In fact, simple static strategies, which by definition involve periodic rebalancing, clearly outperform bucket strategies, and they do so based not just on one but on four different ways of assessing performance."


https://blog.iese.edu/jestrada/files/20 ... proach.pdf
That study included 100+ years of data, during which bond yields were not near or at the zero bound, as they are today. I personally like the bucket approach because with low yields on bonds, I don't expect them to hold up a portfolio as they did in the past. I ladder out the bond allocation 5 years, with the nearest rung in cash, and roll it forward. I do rebalace, which according to the paper implies I should get similar performance to the traditional approach. But so far rebalancing has meant trimming equities every now and then to rebuild outer rungs on the fixed income side as I go along. The strategy is untested in a serious down market - the late 2018 downturn was a speed bump at best. But in principle, I can ride out a prolonged downturn without being forced to sell equities into it. I just have to be willing to let the AA run hotter. In a decade-long bear at some point my hand would be forced, so I'm guessing that as I stare just 1-2 remaing rungs in the face, I might have to bite the bullet and sell a year's worth of spending out of equities no matter the price. I'm prepared for that because I have the ability to accept a lumpier income stream, I can dial back on spending or gifting if the alternative is cat food.

pascalwager
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by pascalwager » Sat Nov 30, 2019 12:25 am

I'd suggest a MMF for the first year and the ST Bond Index Fund for the second and third years. The ST Corp Fund might lose value during a bear market and TBM is too long-term for your application.

Another approach would be to keep the usual six months emergency cash and prepare to possibly live off your portfolio while minimizing spending. But you don't have a portfolio bond allocation, so your portfolio might/might not be too risky for your general situation (You don't disclose age or portfolio size, etc.).

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by alpine_boglehead » Sat Nov 30, 2019 12:32 am

JSnyder wrote:
Fri Nov 29, 2019 8:45 pm
Hopefully (historically speaking) by the time both of these funds are depleted the U.S. stock market will have recovered.
I guess your interpretation bear markets lasting only 2.8 years is that it lasts from the highest point to the lowest point. That doesn't help you if you depend on the money, because a 10% rise after a 50% drop hasn't recovered much ground. Time to recovery of the previous high (counting dividends) historically took longer. The most recent 2000+ and 2008+ bear markets took longer than 2.8 years for stocks to recover (e.g. 2000 to 2003 was just peak to trough).

The viability of your strategy depends on the size of your stock allocation. If your stock allocation is 30 times expenses, you likely won't have a problem, just the dividends alone will probably extend your buffer for another year before you need to start to actually sell.

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HomerJ
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by HomerJ » Sat Nov 30, 2019 12:35 am

dmcmahon wrote:
Fri Nov 29, 2019 10:04 pm
That study included 100+ years of data, during which bond yields were not near or at the zero bound, as they are today. I personally like the bucket approach because with low yields on bonds, I don't expect them to hold up a portfolio as they did in the past.
Bond returns have absolutely been this low in the past. Even lower. Real bond returns were NEGATIVE in the 1950s and the 1970s.
The J stands for Jay

AlohaJoe
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by AlohaJoe » Sat Nov 30, 2019 12:38 am

yogesh wrote:
Fri Nov 29, 2019 10:02 pm
OP - That is fine approach for accumulation.
But how do you fill up the buckets?

Do you fill them up in order? Cash first, then bonds. When those are finally full, you start investing in stocks?

If someone saves 15% a year and has a 20% effective tax rate, then they are spending 65%. It will take 65/15=4 years to fill up that single year of cash. You won't get any investment gains, so you're entirely relying on saving to fill it up. 2 years of bonds will take another 6-8 years. You've spent the entire first decade of investing without any stocks.

Or do you fill them proportionally?

You save 15% a year and so 3% goes to cash, 6% to bonds, and 6% to stocks. But now it'll take over 20 years to fill up the cash & bond buckets. What if there's a crash in the first 2 decades of your investing career? What's the point of even having the buckets if they're not going to be around & effective for almost one-third of your entire life?

If there's a crash, do you refill the buckets the moment stocks start rebounding? How do you know when that is? Do you wait for stocks to hit their previous high level before refilling? Do you refill the buckets <i>all at once</i> even though that means rebalancing $200,000 of portfolio on a single day? Or do you spread it out over weeks or months?

Buckets open up so many questions. So many decisions an investor has to make. I don't know how most investors are going to be in any position to make decisions on these things. Or stick with the decision once reality rears their ugly head.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by rascott » Sat Nov 30, 2019 12:40 am

HomerJ wrote:
Sat Nov 30, 2019 12:35 am
dmcmahon wrote:
Fri Nov 29, 2019 10:04 pm
That study included 100+ years of data, during which bond yields were not near or at the zero bound, as they are today. I personally like the bucket approach because with low yields on bonds, I don't expect them to hold up a portfolio as they did in the past.
Bond returns have absolutely been this low in the past. Even lower. Real bond returns were NEGATIVE in the 1950s and the 1970s.
+1. Surprising people don't know this.

That said, bonds are in the ballpark of 0% real returns right now.

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dmcmahon
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by dmcmahon » Sat Nov 30, 2019 10:09 am

rascott wrote:
Sat Nov 30, 2019 12:40 am
HomerJ wrote:
Sat Nov 30, 2019 12:35 am
dmcmahon wrote:
Fri Nov 29, 2019 10:04 pm
That study included 100+ years of data, during which bond yields were not near or at the zero bound, as they are today. I personally like the bucket approach because with low yields on bonds, I don't expect them to hold up a portfolio as they did in the past.
Bond returns have absolutely been this low in the past. Even lower. Real bond returns were NEGATIVE in the 1950s and the 1970s.
+1. Surprising people don't know this.

That said, bonds are in the ballpark of 0% real returns right now.
I meant nominal yields. The 70s had negative yields because of high inflation. I haven’t studied the 50s, I was aware that they had negative real yields and lowish nominal yields. I believe it is referred to as financial repression. I suspect they weren’t a great period for bond investors. The 70s were terrible. Nominal yields matter, since they give you the opportunity to redeploy or take income without liquidating.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by longinvest » Sat Nov 30, 2019 10:14 am

JSnyder wrote:
Fri Nov 29, 2019 8:45 pm
Where do you errors in my analysis and strategy? Roast me (well not really).
I suggest considering an alternative, this approach.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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Mullins
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Mullins » Sat Nov 30, 2019 11:32 am

JSnyder wrote:
Fri Nov 29, 2019 8:45 pm
I was discussing this topic with a friend today. I might be walking well-tread ground but I guess many topics are recycled here.

Anyway I have 3 buckets

1 year of living expenses in cash (actually Vanguard Short Term Corporate Bonds which I consider cash equivalent)

2 year bonds. Specifically Vanguard Total U.S. Bond Index

The rest in stocks. Mostly Vanguard index but I have some Primecap and Capital Opportunity. I consider these seasoning to my core holdings.

Why 3 buckets? Because historically over the last 100 years my understanding is the longest bear market (down 20 %) has been 2.8 years.

So lets assume a perfect storm: bear market and my wife and I lose our jobs (we are getting older but still working). My first move would be to pare down our living expenses to needs vs wants. I would then consume the Vanguard Short Term Corporate Bond Fund. If the market has not improved I would then consume my Vanguard Total U.S. Bond Index.

Hopefully (historically speaking) by the time both of these funds are depleted the U.S. stock market will have recovered. At this point I can re-create my cash and bond buckets by selling stocks.

Where do you errors in my analysis and strategy? Roast me (well not really).
You might want to read up on Spitzer & Singh, James B. Cloonan and Michael McClung, who though their topic is retirement, your scenario of being unemployed kind of describes the same, so I think it's their overall portfolio strategy which may interest you. Basically what they have in common is the idea of having enough in cash/cash equivalents to ride out market downturns, leaving stocks to recover and go on to new highs. That may give you some more ideas on how many years to set for living expenses and in what vehicles, and how to go about this.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by whodidntante » Sat Nov 30, 2019 12:20 pm

I think OP is advocating for a stock-heavy portfolio, at least once the portfolio is large.

Long-term a heavy allocation to stocks has given a better result than a heavy allocation to bonds. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad. That has certainly been the case for me. I feel like I am playing with the house's money. I can find long time periods where bonds beat stocks by backtesting. But being stock heavy has been a good bet. I think it will be a good bet in the future.

If my portfolio drops 30%, as stock-heavy portfolios will do, I will try to avoid "anchoring" to what my portfolio used to be worth at its all-time high. It's worth what I can sell it for. That might mean I have to sell for less than I paid, but for me, it would take a larger drop than that. It's still a gain end to end and my stock heavy bet has paid off. If you would sweat and lose sleep over not selling at all-time highs, a stock-heavy allocation is not for you.

I was 100% stocks through the dot-bomb and the GFC and never sold out of panic. I'm currently 85% stocks. I don't think I will ever adopt a portfolio with more than 30% fixed income. I actually worry more that 15% fixed income is too much rather than too little, but I have my rationale for it. :happy I also do not overweight USA stocks. My wagon is hitched to global corporate future cash flows and the ability of the market to efficiently price risk.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by iamblessed » Sat Nov 30, 2019 10:16 pm

Maybe with 5 years cash and bond. The recovery from 08-09 was about 5 years.

krb
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by krb » Sun Dec 01, 2019 1:39 am

JSnyder wrote:
Fri Nov 29, 2019 8:45 pm
I was discussing this topic with a friend today. I might be walking well-tread ground but I guess many topics are recycled here.

Anyway I have 3 buckets

1 year of living expenses in cash (actually Vanguard Short Term Corporate Bonds which I consider cash equivalent)

2 year bonds. Specifically Vanguard Total U.S. Bond Index

The rest in stocks. Mostly Vanguard index but I have some Primecap and Capital Opportunity. I consider these seasoning to my core holdings.

Why 3 buckets? Because historically over the last 100 years my understanding is the longest bear market (down 20 %) has been 2.8 years.

So lets assume a perfect storm: bear market and my wife and I lose our jobs (we are getting older but still working). My first move would be to pare down our living expenses to needs vs wants. I would then consume the Vanguard Short Term Corporate Bond Fund. If the market has not improved I would then consume my Vanguard Total U.S. Bond Index.

Hopefully (historically speaking) by the time both of these funds are depleted the U.S. stock market will have recovered. At this point I can re-create my cash and bond buckets by selling stocks.

Where do you errors in my analysis and strategy? Roast me (well not really).
You are not so much looking at longest bear market as much as what is the longest the markets have ever been negative. My recollection is there has never been a 20 year period where the markets were down but there have been a few - maybe 2-3 - 15 year periods. So I had all the money I will for sure not need for 20 years in vtsax r similar. As I’m getting older I’m now 90-10 with a small piece of the 90 in international.

Uncorrelated
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Uncorrelated » Sun Dec 01, 2019 3:32 am

Cash wrote:
Fri Nov 29, 2019 9:27 pm
Ferdinand2014 wrote:
Fri Nov 29, 2019 8:57 pm
"The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?"

Abstract:

"A bucket approach, which broadly consists of parking a few years of annual withdrawals safely in cash and investing the rest of the portfolio more aggressively, is a popular strategy often recommended by financial planners and typically embraced by retirees. Although this strategy is not devoid of merit, the comprehensive evidence discussed here, from 21 countries over a 115-year period, questions its effectiveness. In fact, simple static strategies, which by definition involve periodic rebalancing, clearly outperform bucket strategies, and they do so based not just on one but on four different ways of assessing performance."


https://blog.iese.edu/jestrada/files/20 ... proach.pdf
I don’t think this is quite on point. The OP is not talking about using buckets as a retirement drawdown strategy. Instead, he is in the accumulation phase and is basically trying to figure out his allocation to less risky assets. I also prefer to have a year or so of living expenses in cash and to let the rest ride in equities.

That doesn't really matter though. The theoretical reason for under performance of bucket strategies is that the are path dependent. A path dependent strategy is suboptimal by definition.

The way the OP describes the strategy is just a roundabout way of market timing. If you want to have a strategy that is not market timing, determine your desired asset allocation (i.e. 30% fixed income, 70% equity) and rebalance to that asset allocation regularly. The idea that you should hold cash (and deplete your cash reserves during a bear market) is psychological hogwash.

Mullins wrote:
Sat Nov 30, 2019 11:32 am
JSnyder wrote:
Fri Nov 29, 2019 8:45 pm
I was discussing this topic with a friend today. I might be walking well-tread ground but I guess many topics are recycled here.

Anyway I have 3 buckets

1 year of living expenses in cash (actually Vanguard Short Term Corporate Bonds which I consider cash equivalent)

2 year bonds. Specifically Vanguard Total U.S. Bond Index

The rest in stocks. Mostly Vanguard index but I have some Primecap and Capital Opportunity. I consider these seasoning to my core holdings.

Why 3 buckets? Because historically over the last 100 years my understanding is the longest bear market (down 20 %) has been 2.8 years.

So lets assume a perfect storm: bear market and my wife and I lose our jobs (we are getting older but still working). My first move would be to pare down our living expenses to needs vs wants. I would then consume the Vanguard Short Term Corporate Bond Fund. If the market has not improved I would then consume my Vanguard Total U.S. Bond Index.

Hopefully (historically speaking) by the time both of these funds are depleted the U.S. stock market will have recovered. At this point I can re-create my cash and bond buckets by selling stocks.

Where do you errors in my analysis and strategy? Roast me (well not really).
You might want to read up on Spitzer & Singh, James B. Cloonan and Michael McClung, who though their topic is retirement, your scenario of being unemployed kind of describes the same, so I think it's their overall portfolio strategy which may interest you. Basically what they have in common is the idea of having enough in cash/cash equivalents to ride out market downturns, leaving stocks to recover and go on to new highs. That may give you some more ideas on how many years to set for living expenses and in what vehicles, and how to go about this.
The strategies they recommend are also roundabout market timing. I calculated optimal non-market timing strategies for various scenario's in this topic: viewtopic.php?f=10&t=293469.

Cash
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Cash » Sun Dec 01, 2019 6:12 am

Uncorrelated wrote:
Sun Dec 01, 2019 3:32 am
Cash wrote:
Fri Nov 29, 2019 9:27 pm
Ferdinand2014 wrote:
Fri Nov 29, 2019 8:57 pm
"The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?"

Abstract:

"A bucket approach, which broadly consists of parking a few years of annual withdrawals safely in cash and investing the rest of the portfolio more aggressively, is a popular strategy often recommended by financial planners and typically embraced by retirees. Although this strategy is not devoid of merit, the comprehensive evidence discussed here, from 21 countries over a 115-year period, questions its effectiveness. In fact, simple static strategies, which by definition involve periodic rebalancing, clearly outperform bucket strategies, and they do so based not just on one but on four different ways of assessing performance."


https://blog.iese.edu/jestrada/files/20 ... proach.pdf
I don’t think this is quite on point. The OP is not talking about using buckets as a retirement drawdown strategy. Instead, he is in the accumulation phase and is basically trying to figure out his allocation to less risky assets. I also prefer to have a year or so of living expenses in cash and to let the rest ride in equities.

That doesn't really matter though. The theoretical reason for under performance of bucket strategies is that the are path dependent. A path dependent strategy is suboptimal by definition.

The way the OP describes the strategy is just a roundabout way of market timing. If you want to have a strategy that is not market timing, determine your desired asset allocation (i.e. 30% fixed income, 70% equity) and rebalance to that asset allocation regularly. The idea that you should hold cash (and deplete your cash reserves during a bear market) is psychological hogwash.
There is no plan to deplete it. Just a worst-case scenario.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Dandy » Sun Dec 01, 2019 8:15 am

If the future is similar to the past you probably will be ok. If it isn't and you are short or out of human capital then maybe not ok. There are no do overs if the future is a lot different and if you don't have earning power or are in ill health you might be in a tight spot - consuming equities that have declined a lot and having no fixed income to use or to buy discounted securities.

I guess I look at the investment challenge as what is the minimum of risk I have to take to get/keep financial security. I'm not trying to be a billionaire. So once I have enough to pretty much assure that goal I am more in the asset preservation mode than a growth mode. I still have equities for some inflation protection and for heirs but my NEED to take risk is greatly reduced.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Call_Me_Op » Sun Dec 01, 2019 8:58 am

(Only) 3 years in safe assets would make me very uncomfortable if I were close to or in retirement.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by UpperNwGuy » Sun Dec 01, 2019 9:32 am

whodidntante wrote:
Sat Nov 30, 2019 12:20 pm
Long-term a heavy allocation to stocks has given a better result than a heavy allocation to bonds. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad. That has certainly been the case for me. I feel like I am playing with the house's money. I can find long time periods where bonds beat stocks by backtesting. But being stock heavy has been a good bet. I think it will be a good bet in the future.
Very true. However, using the same logic, the following is also true:

Long-term a heavy allocation to US stocks has given a better result than a heavy allocation to international stocks. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by dbr » Sun Dec 01, 2019 9:43 am

You don't say how far you are from retirement or what your asset allocation actually is, but I think you are barking up the wrong tree. If you are some way from retirement you should have an emergency fund and have devised an asset allocation from need, ability, and willingness to take risk.

If you are near or in retirement then you are probably allocated way to much to stocks, though it is a choice.

I think buckets are a kind of poor way to attempt some kind of market timing scheme or else they are some kind of mental accounting substitute for actually thinking about asset allocation. In either case one-three years in buckets would not amount to much except as an emergency fund.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Sandtrap » Sun Dec 01, 2019 9:50 am

JSnyder wrote:
Fri Nov 29, 2019 8:45 pm
I was discussing this topic with a friend today. I might be walking well-tread ground but I guess many topics are recycled here.

Anyway I have 3 buckets

1 year of living expenses in cash (actually Vanguard Short Term Corporate Bonds which I consider cash equivalent)

2 year bonds. Specifically Vanguard Total U.S. Bond Index

The rest in stocks. Mostly Vanguard index but I have some Primecap and Capital Opportunity. I consider these seasoning to my core holdings.

Why 3 buckets? Because historically over the last 100 years my understanding is the longest bear market (down 20 %) has been 2.8 years.

So lets assume a perfect storm: bear market and my wife and I lose our jobs (we are getting older but still working). My first move would be to pare down our living expenses to needs vs wants. I would then consume the Vanguard Short Term Corporate Bond Fund. If the market has not improved I would then consume my Vanguard Total U.S. Bond Index.

Hopefully (historically speaking) by the time both of these funds are depleted the U.S. stock market will have recovered. At this point I can re-create my cash and bond buckets by selling stocks.

Where do you errors in my analysis and strategy? Roast me (well not really).
Thoughts:
1. What is your allocation? (the larger the total value, the higher the allocation to equities)

2. Consider that the value of Short Term Corporate Bonds fluctuates. Is the 1 year of living expenses also your "emergency fund"?

3. What do you have total in High Yield Accounts, Money Market, and CD's, etc.?

4. Based on your reasoning and bucket sizes, you are expecting market recovery after a downfall to not exceed 3 years. (bucket 1 and 2) What happens on a sustained downturn and recovery beyond 3 years?

5. Consider that what is a 1-2 year bucket now, will be reduced in value in a downturn, so no longer 1-2 year of living expenses.

6. Are you retired and making withdrawals from this portfolio, or are you in the accumulation phase with income?

j
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by willthrill81 » Sun Dec 01, 2019 10:30 am

UpperNwGuy wrote:
Sun Dec 01, 2019 9:32 am
whodidntante wrote:
Sat Nov 30, 2019 12:20 pm
Long-term a heavy allocation to stocks has given a better result than a heavy allocation to bonds. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad. That has certainly been the case for me. I feel like I am playing with the house's money. I can find long time periods where bonds beat stocks by backtesting. But being stock heavy has been a good bet. I think it will be a good bet in the future.
Very true. However, using the same logic, the following is also true:

Long-term a heavy allocation to US stocks has given a better result than a heavy allocation to international stocks. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad.
A big difference in that comparison is that stocks have a higher expected return than bonds, which is not the case for U.S. stocks vs. ex-U.S.
“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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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by UpperNwGuy » Sun Dec 01, 2019 11:00 am

willthrill81 wrote:
Sun Dec 01, 2019 10:30 am
UpperNwGuy wrote:
Sun Dec 01, 2019 9:32 am
whodidntante wrote:
Sat Nov 30, 2019 12:20 pm
Long-term a heavy allocation to stocks has given a better result than a heavy allocation to bonds. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad. That has certainly been the case for me. I feel like I am playing with the house's money. I can find long time periods where bonds beat stocks by backtesting. But being stock heavy has been a good bet. I think it will be a good bet in the future.
Very true. However, using the same logic, the following is also true:

Long-term a heavy allocation to US stocks has given a better result than a heavy allocation to international stocks. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad.
A big difference in that comparison is that stocks have a higher expected return than bonds, which is not the case for U.S. stocks vs. ex-U.S.
We disagree on that.

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willthrill81
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by willthrill81 » Sun Dec 01, 2019 11:07 am

UpperNwGuy wrote:
Sun Dec 01, 2019 11:00 am
willthrill81 wrote:
Sun Dec 01, 2019 10:30 am
UpperNwGuy wrote:
Sun Dec 01, 2019 9:32 am
whodidntante wrote:
Sat Nov 30, 2019 12:20 pm
Long-term a heavy allocation to stocks has given a better result than a heavy allocation to bonds. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad. That has certainly been the case for me. I feel like I am playing with the house's money. I can find long time periods where bonds beat stocks by backtesting. But being stock heavy has been a good bet. I think it will be a good bet in the future.
Very true. However, using the same logic, the following is also true:

Long-term a heavy allocation to US stocks has given a better result than a heavy allocation to international stocks. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad.
A big difference in that comparison is that stocks have a higher expected return than bonds, which is not the case for U.S. stocks vs. ex-U.S.
We disagree on that.
With what, specifically? Do you believe that stocks and bonds have the same expected return?
“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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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by UpperNwGuy » Sun Dec 01, 2019 11:23 am

willthrill81 wrote:
Sun Dec 01, 2019 11:07 am
UpperNwGuy wrote:
Sun Dec 01, 2019 11:00 am
willthrill81 wrote:
Sun Dec 01, 2019 10:30 am
UpperNwGuy wrote:
Sun Dec 01, 2019 9:32 am
whodidntante wrote:
Sat Nov 30, 2019 12:20 pm
Long-term a heavy allocation to stocks has given a better result than a heavy allocation to bonds. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad. That has certainly been the case for me. I feel like I am playing with the house's money. I can find long time periods where bonds beat stocks by backtesting. But being stock heavy has been a good bet. I think it will be a good bet in the future.
Very true. However, using the same logic, the following is also true:

Long-term a heavy allocation to US stocks has given a better result than a heavy allocation to international stocks. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad.
A big difference in that comparison is that stocks have a higher expected return than bonds, which is not the case for U.S. stocks vs. ex-U.S.
We disagree on that.
With what, specifically? Do you believe that stocks and bonds have the same expected return?
I believe that US stocks are more likely to have higher returns going forward than international stocks.

Park
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Park » Sun Dec 01, 2019 11:24 am

A criticism of a buckets strategy is that because one's asset allocation varies depending on market conditions, it's market timing. And if it's market timing, that's a bad idea; few are successful at market timing.

That assumes one considers cash and bonds as investments. But if a financial product doesn't have an expected positive real aftertax return, I don't consider it an investment. By that definition, cash and bonds aren't investments for me.

However, that doesn't mean cash and bonds aren't excellent risk management tools. I know of 3 broad categories of ways to manage risk: diversification, hedging and insurance. Cash and bonds having hedging properties. Cash lets me hedge out the risk of unknown liabilities; bonds let me hedge out the risk of known liabilities (asset liability matching). And just as I don't consider the insurance policies I own as part of my asset allocation, I don't consider my cash and fixed income as part of my asset allocation.

But cash and bonds aren't without risk themselves. My greatest risk is loss of purchasing power. In the short term, stocks have greater risk of that than cash and bonds. But in the long term, cash and bonds have greater risk than stocks. When I read "Stocks for the Long Run", the crossover point is at around 5 years.

So I consider cash and bonds to be a very good way to hedge out the risk of a stock market decline over the next 5 years. If I have enough in cash and bonds to meet known liabilities within the next 5 years plus some to meet unknown liabilities, then that meets my need for cash and bonds.

I consider that 5 years in cash and bonds to be somewhat like a 5 year term insurance policy. If I have cash and bonds as part of my asset allocation, that would be somewhat like cash and bonds being a permanent insurance policy. There can be good reasons to own a permanent insurance policy, but a term policy is the better choice for me.

If I was a more aggressive and risk taking, I might have the equivalent of a 3 year term policy. And on the other side of the coin, one might consider a 10 year term policy.

There are many here, who are more knowledgeable than me. I welcome comments and criticisms.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by willthrill81 » Sun Dec 01, 2019 11:27 am

UpperNwGuy wrote:
Sun Dec 01, 2019 11:23 am
willthrill81 wrote:
Sun Dec 01, 2019 11:07 am
UpperNwGuy wrote:
Sun Dec 01, 2019 11:00 am
willthrill81 wrote:
Sun Dec 01, 2019 10:30 am
UpperNwGuy wrote:
Sun Dec 01, 2019 9:32 am


Very true. However, using the same logic, the following is also true:

Long-term a heavy allocation to US stocks has given a better result than a heavy allocation to international stocks. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad.
A big difference in that comparison is that stocks have a higher expected return than bonds, which is not the case for U.S. stocks vs. ex-U.S.
We disagree on that.
With what, specifically? Do you believe that stocks and bonds have the same expected return?
I believe that US stocks are more likely to have higher returns going forward than international stocks.
On what basis?
“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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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by CoastalWinds » Sun Dec 01, 2019 12:24 pm

yogesh wrote:
Fri Nov 29, 2019 10:02 pm
OP - That is fine approach for accumulation.
At some point 3rd bucket will be too large given first two buckets are fixed amount and you might find it uneasy.

You propose:
Cash ($)
Bond ($)
Stock (Rest)

Most here use:
Cash ($)
Bond x%
Stock (100-x%)
I think many use:

Cash ($)
Cash + Bonds (x%)
Stocks (100-x%)

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by yogesh » Sun Dec 01, 2019 1:31 pm

CoastalWinds wrote:
Sun Dec 01, 2019 12:24 pm
yogesh wrote:
Fri Nov 29, 2019 10:02 pm
OP - That is fine approach for accumulation.
At some point 3rd bucket will be too large given first two buckets are fixed amount and you might find it uneasy.

You propose:
Cash ($)
Bond ($)
Stock (Rest)

Most here use:
Cash ($)
Bond x%
Stock (100-x%)
I think many use:

Cash ($)
Cash + Bonds (x%)
Stocks (100-x%)
I meant to imply two buckets:
Emergency: Cash, CD, MM
Investment: Bonds (x%) + Stocks (Y%) using 1/2/3 fund portfolio
Emergency: FDIC | Taxable: VTMFX | Retirement: TR2040

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by sergio » Sun Dec 01, 2019 2:03 pm

For me: 6 months cash + two 1-year CDs that mature 6 months apart, each with about 1/2 years of expenses.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by whodidntante » Sun Dec 01, 2019 2:36 pm

willthrill81 wrote:
Sun Dec 01, 2019 11:27 am
UpperNwGuy wrote:
Sun Dec 01, 2019 11:23 am
willthrill81 wrote:
Sun Dec 01, 2019 11:07 am
UpperNwGuy wrote:
Sun Dec 01, 2019 11:00 am
willthrill81 wrote:
Sun Dec 01, 2019 10:30 am


A big difference in that comparison is that stocks have a higher expected return than bonds, which is not the case for U.S. stocks vs. ex-U.S.
We disagree on that.
With what, specifically? Do you believe that stocks and bonds have the same expected return?
I believe that US stocks are more likely to have higher returns going forward than international stocks.
On what basis?
Same question.

rhornback
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by rhornback » Mon Dec 02, 2019 10:22 am

dmcmahon wrote:
Fri Nov 29, 2019 10:04 pm
Ferdinand2014 wrote:
Fri Nov 29, 2019 8:57 pm
"The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?"

Abstract:

"A bucket approach, which broadly consists of parking a few years of annual withdrawals safely in cash and investing the rest of the portfolio more aggressively, is a popular strategy often recommended by financial planners and typically embraced by retirees. Although this strategy is not devoid of merit, the comprehensive evidence discussed here, from 21 countries over a 115-year period, questions its effectiveness. In fact, simple static strategies, which by definition involve periodic rebalancing, clearly outperform bucket strategies, and they do so based not just on one but on four different ways of assessing performance."


https://blog.iese.edu/jestrada/files/20 ... proach.pdf
That study included 100+ years of data, during which bond yields were not near or at the zero bound, as they are today. I personally like the bucket approach because with low yields on bonds, I don't expect them to hold up a portfolio as they did in the past. I ladder out the bond allocation 5 years, with the nearest rung in cash, and roll it forward. I do rebalace, which according to the paper implies I should get similar performance to the traditional approach. But so far rebalancing has meant trimming equities every now and then to rebuild outer rungs on the fixed income side as I go along. The strategy is untested in a serious down market - the late 2018 downturn was a speed bump at best. But in principle, I can ride out a prolonged downturn without being forced to sell equities into it. I just have to be willing to let the AA run hotter. In a decade-long bear at some point my hand would be forced, so I'm guessing that as I stare just 1-2 remaing rungs in the face, I might have to bite the bullet and sell a year's worth of spending out of equities no matter the price. I'm prepared for that because I have the ability to accept a lumpier income stream, I can dial back on spending or gifting if the alternative is cat food.
If a decade long downturn occurs (another great depression) I figure we are all in burnt toast. I don't care what your investments are. You could make the argument that in a great depression it would be best to be in cash but if the government decided to print cash to stimulate the economy then that cash would be worthless due to inflation. Or stagflation could occur. I remember the late 70s. We lived in a blue collar area and it seemed that everyone was getting laid off or they had their hours cut. It was bad.

My point is at some point, in a doomsday scenario, all investments have risk.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by willthrill81 » Mon Dec 02, 2019 10:33 am

rhornback wrote:
Mon Dec 02, 2019 10:22 am
If a decade long downturn occurs (another great depression) I figure we are all in burnt toast. I don't care what your investments are. You could make the argument that in a great depression it would be best to be in cash but if the government decided to print cash to stimulate the economy then that cash would be worthless due to inflation. Or stagflation could occur. I remember the late 70s. We lived in a blue collar area and it seemed that everyone was getting laid off or they had their hours cut. It was bad.

My point is at some point, in a doomsday scenario, all investments have risk.
As bad as it was, 75% of workers kept their jobs in the Great Depression, and the sources I've seen indicate that there was not mass starvation. Recent research actually indicates that mortality rates decreased during that time. It was certainly not a doomsday situation, and the nation eventually recovered. Yes, it was very tough on millions of people, and it left an indelible mark on many of those who experienced it, but it was a far cry from an economic collapse.

Keep in mind that the '4% rule' held up quite well throughout the Great Depression as well.

However, that's not to say that the future will be peaches and cream. We don't have to look around much to see nations that experienced far worse problems than anything that's occurred in the U.S. in the last 100 years.
“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

rhornback
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by rhornback » Mon Dec 02, 2019 10:37 am

iamblessed wrote:
Sat Nov 30, 2019 10:16 pm
Maybe with 5 years cash and bond. The recovery from 08-09 was about 5 years.
That is a lot of cash and bonds. It today's market it seems to me that bonds are just keeping up with inflation. The 5 year rate of return for my Vanguard Total Bond Index (Admiral) is 3.2%. My point is the opposite side of risk in equities is that your portfolio is losing value after inflation.

Of course this depends on where you are. If you are at retirement and 'made your number' then I guess it doesn't really matter.

rhornback
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by rhornback » Mon Dec 02, 2019 10:50 am

willthrill81 wrote:
Mon Dec 02, 2019 10:33 am
rhornback wrote:
Mon Dec 02, 2019 10:22 am
If a decade long downturn occurs (another great depression) I figure we are all in burnt toast. I don't care what your investments are. You could make the argument that in a great depression it would be best to be in cash but if the government decided to print cash to stimulate the economy then that cash would be worthless due to inflation. Or stagflation could occur. I remember the late 70s. We lived in a blue collar area and it seemed that everyone was getting laid off or they had their hours cut. It was bad.

My point is at some point, in a doomsday scenario, all investments have risk.
As bad as it was, 75% of workers kept their jobs in the Great Depression, and the sources I've seen indicate that there was not mass starvation. Recent research actually indicates that mortality rates decreased during that time. It was certainly not a doomsday situation, and the nation eventually recovered. Yes, it was very tough on millions of people, and it left an indelible mark on many of those who experienced it, but it was a far cry from an economic collapse.

Keep in mind that the '4% rule' held up quite well throughout the Great Depression as well.

However, that's not to say that the future will be peaches and cream. We don't have to look around much to see nations that experienced far worse problems than anything that's occurred in the U.S. in the last 100 years.
I agree with your point that during the Great Depression not everyone starved. I see a lot of bogleheads trying to minimize risk to the nth degree. For example I have seen discussions on 3% vs 4% and historical analysis where the 4% rule is faulty. Not saying this about you specifically.

One thing that I do see bogleheads write about very much is that they could go back to work if things got bad enough. In realize that in a severe downturn I could probably not get a corporate job but maybe I could drive people around or babysit the grandchildren. Or I am pretty handy. In a downturn I could fix appliances or do handyman work for cash or trade.

Also in a doomsday scenario we could consolidate family assets. I have grown children and two sisters. If it got bad enough we could live in a single location. It might not be fun. But we would survive.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by willthrill81 » Mon Dec 02, 2019 11:01 am

rhornback wrote:
Mon Dec 02, 2019 10:50 am
willthrill81 wrote:
Mon Dec 02, 2019 10:33 am
rhornback wrote:
Mon Dec 02, 2019 10:22 am
If a decade long downturn occurs (another great depression) I figure we are all in burnt toast. I don't care what your investments are. You could make the argument that in a great depression it would be best to be in cash but if the government decided to print cash to stimulate the economy then that cash would be worthless due to inflation. Or stagflation could occur. I remember the late 70s. We lived in a blue collar area and it seemed that everyone was getting laid off or they had their hours cut. It was bad.

My point is at some point, in a doomsday scenario, all investments have risk.
As bad as it was, 75% of workers kept their jobs in the Great Depression, and the sources I've seen indicate that there was not mass starvation. Recent research actually indicates that mortality rates decreased during that time. It was certainly not a doomsday situation, and the nation eventually recovered. Yes, it was very tough on millions of people, and it left an indelible mark on many of those who experienced it, but it was a far cry from an economic collapse.

Keep in mind that the '4% rule' held up quite well throughout the Great Depression as well.

However, that's not to say that the future will be peaches and cream. We don't have to look around much to see nations that experienced far worse problems than anything that's occurred in the U.S. in the last 100 years.
I agree with your point that during the Great Depression not everyone starved. I see a lot of bogleheads trying to minimize risk to the nth degree. For example I have seen discussions on 3% vs 4% and historical analysis where the 4% rule is faulty. Not saying this about you specifically.

One thing that I do see bogleheads write about very much is that they could go back to work if things got bad enough. In realize that in a severe downturn I could probably not get a corporate job but maybe I could drive people around or babysit the grandchildren. Or I am pretty handy. In a downturn I could fix appliances or do handyman work for cash or trade.

Also in a doomsday scenario we could consolidate family assets. I have grown children and two sisters. If it got bad enough we could live in a single location. It might not be fun. But we would survive.
I agree that planning on returning to work during a depression or recession is not a good strategy. Returning to work after the situation improves may be possible, but many would earn far less than they did during their 'first' career, and their age or health could easily prevent them from doing this. It's more realistic for some very early retirees to do this, but even then, I wouldn't recommend it as 'plan B'. Maybe 'plan C or D'.

Concern over the future not being so 'rosy' as the past was partly what drove me to adopt a trend following strategy.
“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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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by 3funder » Mon Dec 02, 2019 11:02 am

UpperNwGuy wrote:
Sun Dec 01, 2019 11:23 am
willthrill81 wrote:
Sun Dec 01, 2019 11:07 am
UpperNwGuy wrote:
Sun Dec 01, 2019 11:00 am
willthrill81 wrote:
Sun Dec 01, 2019 10:30 am
UpperNwGuy wrote:
Sun Dec 01, 2019 9:32 am


Very true. However, using the same logic, the following is also true:

Long-term a heavy allocation to US stocks has given a better result than a heavy allocation to international stocks. And by being invested in those stocks, they tend to appreciate a lot in the good times, so you have more money to lose in the bad.
A big difference in that comparison is that stocks have a higher expected return than bonds, which is not the case for U.S. stocks vs. ex-U.S.
We disagree on that.
With what, specifically? Do you believe that stocks and bonds have the same expected return?
I believe that US stocks are more likely to have higher returns going forward than international stocks.
Given current valuations, I beg to differ. I am 50/50 US/ex-US.

rhornback
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by rhornback » Mon Dec 02, 2019 11:08 am

Dandy wrote:
Sun Dec 01, 2019 8:15 am
If the future is similar to the past you probably will be ok. If it isn't and you are short or out of human capital then maybe not ok. There are no do overs if the future is a lot different and if you don't have earning power or are in ill health you might be in a tight spot - consuming equities that have declined a lot and having no fixed income to use or to buy discounted securities.

I guess I look at the investment challenge as what is the minimum of risk I have to take to get/keep financial security. I'm not trying to be a billionaire. So once I have enough to pretty much assure that goal I am more in the asset preservation mode than a growth mode. I still have equities for some inflation protection and for heirs but my NEED to take risk is greatly reduced.
The one thing I would like to add and then I will stop posting as my last 3 posts probably say the same thing is that most people on Bogleheads have a decent safety cushion and some financial savvy. We can argue until the cows go home about asset allocation and domestic vs international but regardless, most of us have a safety cushion.

In a doomsday scenario assuming the reporting on how few people have enough savings to survive losing their job for 6 months or have enough for retirement consider that a lot of people will be in worse shape then we are. How that would play out would be highly unpredictable. Would the U.S. government allow people to starve? Could the U.S. government nationalize assets and take over your investments? Could we have hyper inflation where your cash and bonds are now worthless? My point is there is no way to create a risk free environment based off your financial assets.

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by rkhusky » Mon Dec 02, 2019 11:11 am

I suggest minimum of 2 years in Short Corp. and 5 years in Total Bond. 3 years in Short Corp. and 7 years in Total Bond would be better.

rhornback
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by rhornback » Mon Dec 02, 2019 11:27 am

rkhusky wrote:
Mon Dec 02, 2019 11:11 am
I suggest minimum of 2 years in Short Corp. and 5 years in Total Bond. 3 years in Short Corp. and 7 years in Total Bond would be better.
I feel this is highly dependent on your age and assets. As an exercise lets assume that you need $100 K in yearly living expenses. I realize that is probably excessive for most. But it makes the numbers easy so lets assume. For your 3/7 scenario that would be 1 million in cash and bonds.

That may make sense if you had 5 mil in assets and you are now 6% cash, 14% bonds, 80% equities. Or if you are in late retirement mode with an expected 10 years to live where you are strictly in cash and bonds.

However there are not a lot of people with 5 mil in assets and I would argue if you retire at 65 with a 1 mil portfolio invested strictly in cash and bonds that you have a high risk or running out of money.

rkhusky
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by rkhusky » Mon Dec 02, 2019 12:30 pm

rhornback wrote:
Mon Dec 02, 2019 11:27 am
rkhusky wrote:
Mon Dec 02, 2019 11:11 am
I suggest minimum of 2 years in Short Corp. and 5 years in Total Bond. 3 years in Short Corp. and 7 years in Total Bond would be better.
I feel this is highly dependent on your age and assets. As an exercise lets assume that you need $100 K in yearly living expenses. I realize that is probably excessive for most. But it makes the numbers easy so lets assume. For your 3/7 scenario that would be 1 million in cash and bonds.

That may make sense if you had 5 mil in assets and you are now 6% cash, 14% bonds, 80% equities. Or if you are in late retirement mode with an expected 10 years to live where you are strictly in cash and bonds.

However there are not a lot of people with 5 mil in assets and I would argue if you retire at 65 with a 1 mil portfolio invested strictly in cash and bonds that you have a high risk or running out of money.
Buckets don't make sense when you are young. Emergency fund of 0.5 - 1 year is enough.

Buckets might make sense when you are 10 years from retirement or closer.

$100K yearly expense is a lot. You'd want a $2.5M - $3.5M portfolio to retire.

Schlabba
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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Schlabba » Mon Dec 02, 2019 1:17 pm

JSnyder wrote:
Fri Nov 29, 2019 8:45 pm
I was discussing this topic with a friend today. I might be walking well-tread ground but I guess many topics are recycled here.

Anyway I have 3 buckets

1 year of living expenses in cash (actually Vanguard Short Term Corporate Bonds which I consider cash equivalent)

2 year bonds. Specifically Vanguard Total U.S. Bond Index

The rest in stocks. Mostly Vanguard index but I have some Primecap and Capital Opportunity. I consider these seasoning to my core holdings.

Why 3 buckets? Because historically over the last 100 years my understanding is the longest bear market (down 20 %) has been 2.8 years.

So lets assume a perfect storm: bear market and my wife and I lose our jobs (we are getting older but still working). My first move would be to pare down our living expenses to needs vs wants. I would then consume the Vanguard Short Term Corporate Bond Fund. If the market has not improved I would then consume my Vanguard Total U.S. Bond Index.

Hopefully (historically speaking) by the time both of these funds are depleted the U.S. stock market will have recovered. At this point I can re-create my cash and bond buckets by selling stocks.

Where do you errors in my analysis and strategy? Roast me (well not really).
Hi OP,

I also use a bucket approach. I call my bond allocation the "emergency fund of my emergency fund". I have about 2 years worth of cash + bonds. I intend to sell all the bonds by the time my shares grow to the point of perpetual withdrawal rate (3%).

Some people are arguing here about the great depression. I believe if you prepare for another great depression, you will be missing out a lot of returns preparing for it.
Also keep in mind selling some shares with a discount doesn't kill you. It might not be optimal, but having a cash/bonds buffer large enough to survive another great depression also isn't optimal.
IWDA: MSCI World | EMIM: MSCI Emerging Markets | AGGH: Global Aggregate Bond Hedged to €

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Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Park » Tue Dec 03, 2019 12:38 am

Ferdinand2014 wrote:
Fri Nov 29, 2019 8:57 pm
"The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?"

Abstract:

"A bucket approach, which broadly consists of parking a few years of annual withdrawals safely in cash and investing the rest of the portfolio more aggressively, is a popular strategy often recommended by financial planners and typically embraced by retirees. Although this strategy is not devoid of merit, the comprehensive evidence discussed here, from 21 countries over a 115-year period, questions its effectiveness. In fact, simple static strategies, which by definition involve periodic rebalancing, clearly outperform bucket strategies, and they do so based not just on one but on four different ways of assessing performance."


https://blog.iese.edu/jestrada/files/20 ... proach.pdf
FWIW, the author of the above article published another article comparing a 90% stock/10% T Bill portfolio used in retirement withdrawal to two 90/10 portfolios that incorporated elements of the bucket strategy. The latter two mildy outperformed the first.

viewtopic.php?f=10&t=267281&p=4307924&h ... s#p4307924

randomguy
Posts: 8400
Joined: Wed Sep 17, 2014 9:00 am

Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by randomguy » Tue Dec 03, 2019 12:49 am

Mullins wrote:
Sat Nov 30, 2019 11:32 am

You might want to read up on Spitzer & Singh, James B. Cloonan and Michael McClung, who though their topic is retirement, your scenario of being unemployed kind of describes the same, so I think it's their overall portfolio strategy which may interest you. Basically what they have in common is the idea of having enough in cash/cash equivalents to ride out market downturns, leaving stocks to recover and go on to new highs. That may give you some more ideas on how many years to set for living expenses and in what vehicles, and how to go about this.
Unemployment is different in that it is expected to end short term while retirement hopefully doesn't:) 3 Years is a very long time for 2 people to stay unemployed. For say 20-45 years old this is a pretty solid plan. We can debate if they should have 1 year fixed income assets or 5 years but 3 years is a pretty reasonable number. As you creep towards retirement adding in more bonds makes sense. The 55 year old who might not work again after being laid off should should be closer to a tradition retirement portfolio.

msk
Posts: 1386
Joined: Mon Aug 15, 2016 10:40 am

Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by msk » Tue Dec 03, 2019 1:49 am

Nuances matter. I have never recognized the idea of "my number" as a useful concept for young people. If you do not build wealth when young, when do you plan to start? If you are not chasing wealth, why aren't you doing great good for humanity rather than work at some corporate grind?

Young people should never fritter away their investment time by parking rather than investing in bonds yielding negative real. Youngsters: go 100% stocks if you are lazy. Chase RE or whatever crazy business you fancy if you are energetic and not risk averse. Even single stock picks. Sooner rather than later you will gravitate to index ETFs. Emergency fund. What's wrong with using brokerage margin as an emergency fund? IB has nice, moderate rates. Anyone really expects to sail through losing his job without trauma? Wishful thinking. Your youth is a brief, one-time opportunity that will never repeat! Use it :mrgreen:

Middle age BHs who have somehow frittered away (or tried and failed in using) their investment youth, listen to all the BH preachings. All that AA stuff. Too late to get rich. Pick your number and save like crazy trying to achieve it, at the same time as college education for the kids is squeezing you. All we can do is offer empathy :oops:

Older BHs who have successfully navigated through their investment youths and are either close to or even post retirement: You do not need any advice from anybody. I am 20 years past retirement and am happy with 100% stocks. You happy with 100% bonds yielding zero real? Stay happy :moneybag

I note that these threads display some excessive pessimism at times; major recessions lasting a decade or more with simultaneous unemployment. Only way you can be totally secure is to be dead! No worry, we will all get there soon enough. What about World War III? There will be a need for millions of soldiers, so unemployment will not be a major factor :shock:

Ferdinand2014
Posts: 836
Joined: Mon Dec 17, 2018 6:49 pm

Re: My 3 buckets: 1 yr cash + 2 yr bond + stocks

Post by Ferdinand2014 » Tue Dec 03, 2019 9:02 am

Park wrote:
Tue Dec 03, 2019 12:38 am
Ferdinand2014 wrote:
Fri Nov 29, 2019 8:57 pm
"The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?"

Abstract:

"A bucket approach, which broadly consists of parking a few years of annual withdrawals safely in cash and investing the rest of the portfolio more aggressively, is a popular strategy often recommended by financial planners and typically embraced by retirees. Although this strategy is not devoid of merit, the comprehensive evidence discussed here, from 21 countries over a 115-year period, questions its effectiveness. In fact, simple static strategies, which by definition involve periodic rebalancing, clearly outperform bucket strategies, and they do so based not just on one but on four different ways of assessing performance."


https://blog.iese.edu/jestrada/files/20 ... proach.pdf
FWIW, the author of the above article published another article comparing a 90% stock/10% T Bill portfolio used in retirement withdrawal to two 90/10 portfolios that incorporated elements of the bucket strategy. The latter two mildy outperformed the first.

viewtopic.php?f=10&t=267281&p=4307924&h ... s#p4307924
Intersting. I actually have that article as well. I had forgotten about it.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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