A Better Bucketing Approach: Financial Advisors' Daily Digest

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By SA Gil Weinreich :

For those who follow SA contributor Ron Surz, as I do regularly, his calling the "buckets" approach to investing "baloney" is curious at first, as one might assume he favors it. At least, he hardly seems an orthodox proponent of its theoretical opposite, which would be optimizing along the efficient frontier for a systematic withdrawal from a unitary portfolio; the famous 4% rule is an example of this.

For those unfamiliar with the term, the bucket approach refers to any one of several goals-based strategies that allocate client assets according to early, later and more distant phases of retirement. For the earliest phase (which could be, say, three or five years), investors would set aside a "bucket" that will meet his income needs through cash and cash equivalents; for a middle phase that might extend from, say, five to 15 years, investors would set aside a portion of fund that are invested in fixed-income securities; and the third bucket, designed to meet needs for 15 or more years away, investors would allocate a bucket of equity investments that exhibit greater volatility but which are expected to generate greater returns.

Ron is a smart guy, and his work hardly requires my or anybody else's translation, but I do feel his superb article invites discussion. So I recommend you read it first here , but I will cut to what I think is the chase.

Some of the criticisms of buckets he cites are really modifications of the idea. For example, Harold Evensky finds two buckets more manageable than three. But in any event, the money-quote in Ron's article comes here:

To my mind, that is the have-your-cake-and-eat-it-too approach to investing. You get aggressive and conservative at the same time, portfolio optimization and hedging at the same time. It's easier to manage and easier to conceptualize (e.g., three buckets, one-third each).

The irony though is that it is still a buckets approach - just not the usual buckets approach. One bucket carries enough cash to weather any crisis. The next bucket holds equities and is optimized for maximum return. For some, perhaps Evensky, that's enough. For my part, I have written numerous times that real estate should be seen as the third leg of the tripod. It has high long-term returns, is not highly correlated with stocks, and you get to live in it. I like this better than a bond bucket, but others will differ.

As Ron puts it, "better buckets bring bountiful bucks."

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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