The “Bucket Strategy” is ineffective (ERN)

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randomguy
Posts: 11285
Joined: Wed Sep 17, 2014 9:00 am

Re: The “Bucket Strategy” is ineffective (ERN)

Post by randomguy »

nedsaid wrote: Thu Jan 26, 2023 5:20 pm
The reason for a bucket strategy is more psychological than mathematical. It is a way of allowing the stocks in your portfolio to recover from market corrections and bear markets. Doesn't seem like a good strategy to sell stocks near the bottom of a bear market to raise cash to live on. There is also a strategy of withdrawing from stocks in good years for the stock market and from bonds during bad years.

There are any number of withdrawal strategies. They all have their drawbacks. I have looked at most all of them.
Sure but don't you think it would be a good idea to BUY stocks at the bottom like the fixed AA does? You aren't going to be selling stocks in bear markets. You will be selling bonds.

Lets look at the super simple case. 25x of expenses
a) 25x 50/50
b) 5 years in cash, 20x invested 62.5%/37.5%. We spend cash when the portfolio is below starting value

So 2000 rolls around. Where are we after 5 years
a) 1million (all nominal to keep it easy)->937k. Portfolio bottom out at ~800k
b) 800k->897k. You will also have about 6k of cash left. It bottom out at ~645k and you had about 100k in cash.

So despite not having to "sell" stocks, you basically had a lower net worth throughout this time period. The rising equity path of the buckets sort of screwed you as when 2002 hit you had a higher exposure to stocks and paid the price. Now the higher equity allocation does help out later on.

Fast forward to 2023 and the the 50/50 person has 1.027m and the bucket person has 1.087m. The slightly higher stock allocation paid off in slightly more money. Of course you had a bumpier ride in 2007-2009. If you would have refilled your cash bucket at any points, the difference would have dropped.
AlwaysLearningMore
Posts: 1914
Joined: Sun Jul 26, 2020 2:29 pm

Re: The “Bucket Strategy” is ineffective (ERN)

Post by AlwaysLearningMore »

randomguy wrote: Thu Jan 26, 2023 1:44 pm
AlwaysLearningMore wrote: Thu Jan 26, 2023 8:33 am
cbox wrote: Wed Jan 25, 2023 12:54 pm
nisiprius wrote: Wed Jan 25, 2023 10:20 am I'll just make a mental note that what I've thought for years has been confirmed.

The basic problem with bucket strategies, I think, is the idea of "a cash reserve big enough to ride through a bear market without needing to sell stocks." The problem is that there is no limit on the length of a bear market, and the statistics have the kind of "long tail" that makes near-guarantees impossible.
Arguments such as this are specious because they suggest that if a defensive solution does not cover all possible scenarios, then it is not worth implementing.

That's incorrect. Put simply: something is better than nothing. If I have 2 years of cash reserves that allow me not to withdraw retirement funds during a bear market that lasts 5 years, well, then, that's better than having no cash reserves at all, isn't it?
Exactly.

Those in search of a perfect solution that covers all financial permutations are likely to be disappointed.
And what is the point of implementing a solution that does nothing? Doing something is not better than doing nothing cause doing nothing is often the best move. The assumption that having 2 years in cash is better than sticking that money into the portfolio is better has no basis in reality. Everyone thinks it sounds brilliant when they first hear it. But whenever you do the math it makes basically no difference. Some time the fluctuating AA gives you a slight bonus. Other times a slight penalty. But we are talking minimal changes (i.e. holding 58/42 versus 60/40) for most schemes.

Buckets aren't horrible. You are not going to ruin your retirement by using them. But they also have basically no positive benefit other than the delusion that you are avoiding SORR. If you believe in buckets, you should stop reading these threads because once you understand the math, you will lose that peace of mind...

Sorry, must respectfully disagree. (And I don't think I'm in bad company with Christine Benz, and Bill Bernstein added his opinion on a positive point of the bucket strategy above.) I'm poised to enter retirement this summer, and we'll be using the TSP G fund (one spouse has access) for the "safety bucket" to cover a number of years' expenses beyond those covered by pensions, annuities, savings bonds and other guaranteed income streams. (We are far from SS age.) We don't even include the "safety bucket" in our AA (I know, horrors, 'AA math imprecision'), and aren't concerned with the long-term difference in return between 60/40 or 58/42.
When both stocks and bonds were falling recently (as interest rates moved up), the G fund didn't lose a penny. I suspect (and hope) that no stable-value funds did, either. Money market funds held pat AFAIK. Guess we'd prefer not to sell equities (or bonds which are falling in value) to make ends meet during such scenarios. YMMV.

Garland Whizzer is far more eloquent than I, and put it well IMHO.
garlandwhizzer wrote: Thu Jan 26, 2023 2:36 pm The bucket strategy is ineffective? First of all, it is not about optimizing return relative to SAA. I believe it is an appropriate tradeoff between expected return and emotional comfort for those in the de-cumulation/retirement phase who annually derive significant annual income for living expenses from selling portfolio assets in a non-tax deferred account over an above IRA RMDs +SS. For that group, of which I am one, a bucket strategy seems appropriate.

This is particularly true in the situation of stagflation with job losses (1970s) where both stocks and bonds produced strongly negative real principal losses while cash remained boringly stable. The cash or MMF in a bucket strategy or an emergency fund allocation can provide some level of comfort when unexpected emergencies happen personally or when the market changes and stocks and bonds suffer like now. Comfort itself has some financial value. It is when investors get very uncomfortable that they make behavioral mistakes like selling into bear market weakness. High anxiety or euphoria are not optimal emotional states to make sound financial decisions. Best to avoid both.....

Investing is more an art than a science that can be proven by backtesting. Part of that art is attuning your portfolio to your own financial circumstances, emotional risk tolerance, and financial goals in a realistic manner that provides a optimal livable balance between maximizing expected long term return (100% stocks) and minimizing risk and anxiety (100% rolling TIPS ladder with generous annual real income). Compromises must be made to set the right balance for the individual and for many a modest allocation to bucket strategy or emergency fund is entirely appropriate IMO. There is a reason why trusted and well regarded financial firms like Vanguard and Schwab as well as Christine Benz of Morningstar recommend it.

Personally, I use a bucket strategy. I am 75 years old, retired for 25 years, and I'm still 75% stocks which means a lot of portfolio volatility which I tolerate well without a lot of anxiety through many bear markets, some bad ones. My bucket of 2 - 3 years living expenses in cash offers me in bear markets is time. I have at least 2 - 3 years of time for either the markets to bounce back or, if they don't, for me to find a better opportunity to sell assets to generate income. I replenish it every year. There is absolutely no time pressure even when bonds tank with stocks. My excess returns from 75% equity will far outweigh any piddling loss of risk-adjusted return from holding modest cash in fixed income. Equity is the source of outsized returns and more than worth its increased volatility IMO. If you really want to maximize long term return, maximize equity up to your risk tolerance. Looking at the portfolio as a whole I believe a bucket strategy has helped me to tolerate a higher equity allocation emotionally for more than 2 decades of living off my portfolio, actually increasing my overall portfolio returns. I don't care what backtesting dictates. That works for me. Others may see it differently which is fine with me.

Garland Whizzer
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
marcopolo
Posts: 8411
Joined: Sat Dec 03, 2016 9:22 am

Re: The “Bucket Strategy” is ineffective (ERN)

Post by marcopolo »

AlwaysLearningMore wrote: Thu Jan 26, 2023 7:05 pm
randomguy wrote: Thu Jan 26, 2023 1:44 pm
AlwaysLearningMore wrote: Thu Jan 26, 2023 8:33 am
cbox wrote: Wed Jan 25, 2023 12:54 pm
nisiprius wrote: Wed Jan 25, 2023 10:20 am I'll just make a mental note that what I've thought for years has been confirmed.

The basic problem with bucket strategies, I think, is the idea of "a cash reserve big enough to ride through a bear market without needing to sell stocks." The problem is that there is no limit on the length of a bear market, and the statistics have the kind of "long tail" that makes near-guarantees impossible.
Arguments such as this are specious because they suggest that if a defensive solution does not cover all possible scenarios, then it is not worth implementing.

That's incorrect. Put simply: something is better than nothing. If I have 2 years of cash reserves that allow me not to withdraw retirement funds during a bear market that lasts 5 years, well, then, that's better than having no cash reserves at all, isn't it?
Exactly.

Those in search of a perfect solution that covers all financial permutations are likely to be disappointed.
And what is the point of implementing a solution that does nothing? Doing something is not better than doing nothing cause doing nothing is often the best move. The assumption that having 2 years in cash is better than sticking that money into the portfolio is better has no basis in reality. Everyone thinks it sounds brilliant when they first hear it. But whenever you do the math it makes basically no difference. Some time the fluctuating AA gives you a slight bonus. Other times a slight penalty. But we are talking minimal changes (i.e. holding 58/42 versus 60/40) for most schemes.

Buckets aren't horrible. You are not going to ruin your retirement by using them. But they also have basically no positive benefit other than the delusion that you are avoiding SORR. If you believe in buckets, you should stop reading these threads because once you understand the math, you will lose that peace of mind...

Sorry, must respectfully disagree. (And I don't think I'm in bad company with Christine Benz, and Bill Bernstein added his opinion on a positive point of the bucket strategy above.) I'm poised to enter retirement this summer, and we'll be using the TSP G fund (one spouse has access) for the "safety bucket" to cover a number of years' expenses beyond those covered by pensions, annuities, savings bonds and other guaranteed income streams. (We are far from SS age.) We don't even include the "safety bucket" in our AA (I know, horrors, 'AA math imprecision'), and aren't concerned with the long-term difference in return between 60/40 or 58/42.
When both stocks and bonds were falling recently (as interest rates moved up), the G fund didn't lose a penny. I suspect (and hope) that no stable-value funds did, either. Money market funds held pat AFAIK. Guess we'd prefer not to sell equities (or bonds which are falling in value) to make ends meet during such scenarios. YMMV.

Garland Whizzer is far more eloquent than I, and put it well IMHO.
garlandwhizzer wrote: Thu Jan 26, 2023 2:36 pm The bucket strategy is ineffective? First of all, it is not about optimizing return relative to SAA. I believe it is an appropriate tradeoff between expected return and emotional comfort for those in the de-cumulation/retirement phase who annually derive significant annual income for living expenses from selling portfolio assets in a non-tax deferred account over an above IRA RMDs +SS. For that group, of which I am one, a bucket strategy seems appropriate.

This is particularly true in the situation of stagflation with job losses (1970s) where both stocks and bonds produced strongly negative real principal losses while cash remained boringly stable. The cash or MMF in a bucket strategy or an emergency fund allocation can provide some level of comfort when unexpected emergencies happen personally or when the market changes and stocks and bonds suffer like now. Comfort itself has some financial value. It is when investors get very uncomfortable that they make behavioral mistakes like selling into bear market weakness. High anxiety or euphoria are not optimal emotional states to make sound financial decisions. Best to avoid both.....

Investing is more an art than a science that can be proven by backtesting. Part of that art is attuning your portfolio to your own financial circumstances, emotional risk tolerance, and financial goals in a realistic manner that provides a optimal livable balance between maximizing expected long term return (100% stocks) and minimizing risk and anxiety (100% rolling TIPS ladder with generous annual real income). Compromises must be made to set the right balance for the individual and for many a modest allocation to bucket strategy or emergency fund is entirely appropriate IMO. There is a reason why trusted and well regarded financial firms like Vanguard and Schwab as well as Christine Benz of Morningstar recommend it.

Personally, I use a bucket strategy. I am 75 years old, retired for 25 years, and I'm still 75% stocks which means a lot of portfolio volatility which I tolerate well without a lot of anxiety through many bear markets, some bad ones. My bucket of 2 - 3 years living expenses in cash offers me in bear markets is time. I have at least 2 - 3 years of time for either the markets to bounce back or, if they don't, for me to find a better opportunity to sell assets to generate income. I replenish it every year. There is absolutely no time pressure even when bonds tank with stocks. My excess returns from 75% equity will far outweigh any piddling loss of risk-adjusted return from holding modest cash in fixed income. Equity is the source of outsized returns and more than worth its increased volatility IMO. If you really want to maximize long term return, maximize equity up to your risk tolerance. Looking at the portfolio as a whole I believe a bucket strategy has helped me to tolerate a higher equity allocation emotionally for more than 2 decades of living off my portfolio, actually increasing my overall portfolio returns. I don't care what backtesting dictates. That works for me. Others may see it differently which is fine with me.

Garland Whizzer
Do you, or any of the authoritative people you reference, have any quantifiable improvement that a bucket approach provides over a significantly simpler static allocation approach (which could also include cash holdings)?

What I typically see is someone making the qualitative argument about how having a "safe bucket" helps you get through market down turns. It does sound appealing.

Then someone points out that numerous actual studies/analysis have shown that the added complexity does not really provide any benefit. I am not sure I have seen any studies to the contrary, I would be interested in seeing them if they exist. Do you have any references?

Then the pro-bucket argument usually becomes, "well, it might not provide any measurable benefit, but it helps people sleep well at night, which has value".

The question i would have is why do people feel comforted by something that does not provide protection against the thing that is keeping one awake. Seems like a false sense of security.
Once in a while you get shown the light, in the strangest of places if you look at it right.
AlwaysLearningMore
Posts: 1914
Joined: Sun Jul 26, 2020 2:29 pm

Re: The “Bucket Strategy” is ineffective (ERN)

Post by AlwaysLearningMore »

marcopolo wrote: Thu Jan 26, 2023 7:21 pm
AlwaysLearningMore wrote: Thu Jan 26, 2023 7:05 pm
randomguy wrote: Thu Jan 26, 2023 1:44 pm
AlwaysLearningMore wrote: Thu Jan 26, 2023 8:33 am
cbox wrote: Wed Jan 25, 2023 12:54 pm

Arguments such as this are specious because they suggest that if a defensive solution does not cover all possible scenarios, then it is not worth implementing.

That's incorrect. Put simply: something is better than nothing. If I have 2 years of cash reserves that allow me not to withdraw retirement funds during a bear market that lasts 5 years, well, then, that's better than having no cash reserves at all, isn't it?
Exactly.

Those in search of a perfect solution that covers all financial permutations are likely to be disappointed.
And what is the point of implementing a solution that does nothing? Doing something is not better than doing nothing cause doing nothing is often the best move. The assumption that having 2 years in cash is better than sticking that money into the portfolio is better has no basis in reality. Everyone thinks it sounds brilliant when they first hear it. But whenever you do the math it makes basically no difference. Some time the fluctuating AA gives you a slight bonus. Other times a slight penalty. But we are talking minimal changes (i.e. holding 58/42 versus 60/40) for most schemes.

Buckets aren't horrible. You are not going to ruin your retirement by using them. But they also have basically no positive benefit other than the delusion that you are avoiding SORR. If you believe in buckets, you should stop reading these threads because once you understand the math, you will lose that peace of mind...

Sorry, must respectfully disagree. (And I don't think I'm in bad company with Christine Benz, and Bill Bernstein added his opinion on a positive point of the bucket strategy above.) I'm poised to enter retirement this summer, and we'll be using the TSP G fund (one spouse has access) for the "safety bucket" to cover a number of years' expenses beyond those covered by pensions, annuities, savings bonds and other guaranteed income streams. (We are far from SS age.) We don't even include the "safety bucket" in our AA (I know, horrors, 'AA math imprecision'), and aren't concerned with the long-term difference in return between 60/40 or 58/42.
When both stocks and bonds were falling recently (as interest rates moved up), the G fund didn't lose a penny. I suspect (and hope) that no stable-value funds did, either. Money market funds held pat AFAIK. Guess we'd prefer not to sell equities (or bonds which are falling in value) to make ends meet during such scenarios. YMMV.

Garland Whizzer is far more eloquent than I, and put it well IMHO.
garlandwhizzer wrote: Thu Jan 26, 2023 2:36 pm The bucket strategy is ineffective? First of all, it is not about optimizing return relative to SAA. I believe it is an appropriate tradeoff between expected return and emotional comfort for those in the de-cumulation/retirement phase who annually derive significant annual income for living expenses from selling portfolio assets in a non-tax deferred account over an above IRA RMDs +SS. For that group, of which I am one, a bucket strategy seems appropriate.

This is particularly true in the situation of stagflation with job losses (1970s) where both stocks and bonds produced strongly negative real principal losses while cash remained boringly stable. The cash or MMF in a bucket strategy or an emergency fund allocation can provide some level of comfort when unexpected emergencies happen personally or when the market changes and stocks and bonds suffer like now. Comfort itself has some financial value. It is when investors get very uncomfortable that they make behavioral mistakes like selling into bear market weakness. High anxiety or euphoria are not optimal emotional states to make sound financial decisions. Best to avoid both.....

Investing is more an art than a science that can be proven by backtesting. Part of that art is attuning your portfolio to your own financial circumstances, emotional risk tolerance, and financial goals in a realistic manner that provides a optimal livable balance between maximizing expected long term return (100% stocks) and minimizing risk and anxiety (100% rolling TIPS ladder with generous annual real income). Compromises must be made to set the right balance for the individual and for many a modest allocation to bucket strategy or emergency fund is entirely appropriate IMO. There is a reason why trusted and well regarded financial firms like Vanguard and Schwab as well as Christine Benz of Morningstar recommend it.

Personally, I use a bucket strategy. I am 75 years old, retired for 25 years, and I'm still 75% stocks which means a lot of portfolio volatility which I tolerate well without a lot of anxiety through many bear markets, some bad ones. My bucket of 2 - 3 years living expenses in cash offers me in bear markets is time. I have at least 2 - 3 years of time for either the markets to bounce back or, if they don't, for me to find a better opportunity to sell assets to generate income. I replenish it every year. There is absolutely no time pressure even when bonds tank with stocks. My excess returns from 75% equity will far outweigh any piddling loss of risk-adjusted return from holding modest cash in fixed income. Equity is the source of outsized returns and more than worth its increased volatility IMO. If you really want to maximize long term return, maximize equity up to your risk tolerance. Looking at the portfolio as a whole I believe a bucket strategy has helped me to tolerate a higher equity allocation emotionally for more than 2 decades of living off my portfolio, actually increasing my overall portfolio returns. I don't care what backtesting dictates. That works for me. Others may see it differently which is fine with me.

Garland Whizzer
Do you, or any of the authoritative people you reference, have any quantifiable improvement that a bucket approach provides over a significantly simpler static allocation approach (which could also include cash holdings)?

What I typically see is someone making the qualitative argument about how having a "safe bucket" helps you get through market down turns. It does sound appealing.

Then someone points out that numerous actual studies/analysis have shown that the added complexity does not really provide any benefit. I am not sure I have seen any studies to the contrary, I would be interested in seeing them if they exist. Do you have any references?

Then the pro-bucket argument usually becomes, "well, it might not provide any measurable benefit, but it helps people sleep well at night, which has value".

The question i would have is why do people feel comforted by something that does not provide protection against the thing that is keeping one awake. Seems like a false sense of security.
From my perspective, having a "safe bucket" to draw from during bear (stock, or stock + bond) markets seems pretty simple. A 2 bucket approach doesn't seem to add much complexity. It's just a reserve pool for the bad times (and in our cases it will yield intermed. term Treasury rate, or thereabouts). You may have a different opinion.

Perhaps you can search the Morningstar site for any references Ms. Benz has used to support her articles. And as a professional financial advisor, I'm sure Dr. Bernstein has practical experience with this. (You could direct a query his way.)

Opinions may vary, but I find comfort in knowing I won't need to liquidate stocks (or bonds, if they fall as well) for years during a market downturn. Others may not be perturbed if they have to sell stocks and bonds during a crash. Everyone is wired a little differently.

Really, I can't state it any better than Garland Whizzer:
garlandwhizzer wrote: Thu Jan 26, 2023 2:36 pm My bucket of 2 - 3 years living expenses in cash offers me in bear markets is time. I have at least 2 - 3 years of time for either the markets to bounce back or, if they don't, for me to find a better opportunity to sell assets to generate income. I replenish it every year. There is absolutely no time pressure even when bonds tank with stocks. My excess returns from 75% equity will far outweigh any piddling loss of risk-adjusted return from holding modest cash in fixed income. Equity is the source of outsized returns and more than worth its increased volatility IMO. If you really want to maximize long term return, maximize equity up to your risk tolerance. Looking at the portfolio as a whole I believe a bucket strategy has helped me to tolerate a higher equity allocation emotionally for more than 2 decades of living off my portfolio, actually increasing my overall portfolio returns. I don't care what backtesting dictates. That works for me. Others may see it differently which is fine with me.

Garland Whizzer
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
alex_686
Posts: 13286
Joined: Mon Feb 09, 2015 1:39 pm

Re: The “Bucket Strategy” is ineffective (ERN)

Post by alex_686 »

marcopolo wrote: Thu Jan 26, 2023 7:21 pm The question i would have is why do people feel comforted by something that does not provide protection against the thing that is keeping one awake. Seems like a false sense of security.
Behavioral Economics. You are dealing with a complex emotionally charged subjects. Intellectual shortcuts are tempting. Having worked with a fair number of people and situations you have to pick your battles. Some subjects are sticker, others have more impact.

I think the bucket approach is stickier. It ties into both cognitive load and behavioral errors. Education can address the first but rarely the second.

Specifically it offers the promise that you won’t have to recognize realized losses in equities. It is deeply embedded in out skulls that this is important. That logically unrealized and realized have the same impact on a portfolio is abstract math.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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nedsaid
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by nedsaid »

randomguy wrote: Thu Jan 26, 2023 7:00 pm
nedsaid wrote: Thu Jan 26, 2023 5:20 pm
The reason for a bucket strategy is more psychological than mathematical. It is a way of allowing the stocks in your portfolio to recover from market corrections and bear markets. Doesn't seem like a good strategy to sell stocks near the bottom of a bear market to raise cash to live on. There is also a strategy of withdrawing from stocks in good years for the stock market and from bonds during bad years.

There are any number of withdrawal strategies. They all have their drawbacks. I have looked at most all of them.
Sure but don't you think it would be a good idea to BUY stocks at the bottom like the fixed AA does? You aren't going to be selling stocks in bear markets. You will be selling bonds.

Lets look at the super simple case. 25x of expenses
a) 25x 50/50
b) 5 years in cash, 20x invested 62.5%/37.5%. We spend cash when the portfolio is below starting value

So 2000 rolls around. Where are we after 5 years
a) 1million (all nominal to keep it easy)->937k. Portfolio bottom out at ~800k
b) 800k->897k. You will also have about 6k of cash left. It bottom out at ~645k and you had about 100k in cash.

So despite not having to "sell" stocks, you basically had a lower net worth throughout this time period. The rising equity path of the buckets sort of screwed you as when 2002 hit you had a higher exposure to stocks and paid the price. Now the higher equity allocation does help out later on.

Fast forward to 2023 and the the 50/50 person has 1.027m and the bucket person has 1.087m. The slightly higher stock allocation paid off in slightly more money. Of course you had a bumpier ride in 2007-2009. If you would have refilled your cash bucket at any points, the difference would have dropped.
I am still thinking about withdrawal strategies in retirement. Still thinking about the form the portfolio would take when I finally decide to retire.

Don't think I have ever rebalanced from Bonds to Stocks, it has always been the other way around. The closest I did to that was a full year of putting all of my new funds into Stocks. Hard to imagine that I would want to rebalance into Stocks in retirement.

So I will cross that bridge when I come to it. Still researching my different options.
A fool and his money are good for business.
marcopolo
Posts: 8411
Joined: Sat Dec 03, 2016 9:22 am

Re: The “Bucket Strategy” is ineffective (ERN)

Post by marcopolo »

nedsaid wrote: Thu Jan 26, 2023 8:18 pm
randomguy wrote: Thu Jan 26, 2023 7:00 pm
nedsaid wrote: Thu Jan 26, 2023 5:20 pm
The reason for a bucket strategy is more psychological than mathematical. It is a way of allowing the stocks in your portfolio to recover from market corrections and bear markets. Doesn't seem like a good strategy to sell stocks near the bottom of a bear market to raise cash to live on. There is also a strategy of withdrawing from stocks in good years for the stock market and from bonds during bad years.

There are any number of withdrawal strategies. They all have their drawbacks. I have looked at most all of them.
Sure but don't you think it would be a good idea to BUY stocks at the bottom like the fixed AA does? You aren't going to be selling stocks in bear markets. You will be selling bonds.

Lets look at the super simple case. 25x of expenses
a) 25x 50/50
b) 5 years in cash, 20x invested 62.5%/37.5%. We spend cash when the portfolio is below starting value

So 2000 rolls around. Where are we after 5 years
a) 1million (all nominal to keep it easy)->937k. Portfolio bottom out at ~800k
b) 800k->897k. You will also have about 6k of cash left. It bottom out at ~645k and you had about 100k in cash.

So despite not having to "sell" stocks, you basically had a lower net worth throughout this time period. The rising equity path of the buckets sort of screwed you as when 2002 hit you had a higher exposure to stocks and paid the price. Now the higher equity allocation does help out later on.

Fast forward to 2023 and the the 50/50 person has 1.027m and the bucket person has 1.087m. The slightly higher stock allocation paid off in slightly more money. Of course you had a bumpier ride in 2007-2009. If you would have refilled your cash bucket at any points, the difference would have dropped.
I am still thinking about withdrawal strategies in retirement. Still thinking about the form the portfolio would take when I finally decide to retire.

Don't think I have ever rebalanced from Bonds to Stocks, it has always been the other way around. The closest I did to that was a full year of putting all of my new funds into Stocks. Hard to imagine that I would want to rebalance into Stocks in retirement.

So I will cross that bridge when I come to it. Still researching my different options.
But, that is precisely why a disciplined static allocation strategy is tough to beat. It kind of forces you to buy stocks when they are down, and sell them when they are up, but without having to do so based on some gut feel.

A simple withdrawal strategy will provide as good or better outcomes without adding complexity of thinking about buckets, how to fill them, etc.

A withdrawal plan could as simple as this:

1) Choose an asset allocation target (e.g., 60/40)
2) Turn off re-investments in taxable account, use it for spending.
3) If more money is needed, sell some of the asset class that is over-weighted.
4) Use a trigger band (e.g. 5%) to rebalance, if (2) and (3) don't do the job. (This will happen pretty rarely, last time for us was March 2020)

No need to agonize over when to fill buckets, when to shift into/out of equities, etc.
There is little evidence that adding the complexity of buckets will do any better than the simple plan above.

Even though things looked pretty bleak in march 2020, I had no problems selling some fixed income to buy more equities because there was a well defined (yet simple) criteria for doing so. One of the problems with the bucket/cash cushion approach is that most people employing them can't articulate their specific plan for when/how they will refill them. So, it is left to some ad-hoc real-time decision making, which often leads to behavioral errors.
Once in a while you get shown the light, in the strangest of places if you look at it right.
randomguy
Posts: 11285
Joined: Wed Sep 17, 2014 9:00 am

Re: The “Bucket Strategy” is ineffective (ERN)

Post by randomguy »

AlwaysLearningMore wrote: Thu Jan 26, 2023 7:05 pm

Sorry, must respectfully disagree. (And I don't think I'm in bad company with Christine Benz, and Bill Bernstein added his opinion on a positive point of the bucket strategy above.) I'm poised to enter retirement this summer, and we'll be using the TSP G fund (one spouse has access) for the "safety bucket" to cover a number of years' expenses beyond those covered by pensions, annuities, savings bonds and other guaranteed income streams. (We are far from SS age.) We don't even include the "safety bucket" in our AA (I know, horrors, 'AA math imprecision'), and aren't concerned with the long-term difference in return between 60/40 or 58/42.
When both stocks and bonds were falling recently (as interest rates moved up), the G fund didn't lose a penny. I suspect (and hope) that no stable-value funds did, either. Money market funds held pat AFAIK. Guess we'd prefer not to sell equities (or bonds which are falling in value) to make ends meet during such scenarios. YMMV.


There is zero reason why you can't hold a fixed AA and use the G fund if you want. That is a choice that has nothing to do with buckets. That is about what assets you want in your portfolio. In the half dozen papers I have read by Christine Benz and Bill Bernstein on bucks, there isn't a single one that runs the math and shows that it helps. This isn't a matter of opinion. It is a matter of simple math. You take your bucket scheme and compare to holding a fixed AA. If the bucket scheme was better, you would see a big benefit. For some reason not a single bucket advocate can ever do that.
stocknoob4111
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by stocknoob4111 »

My strategy is to just have some cash pool set aside to reduce the WIthdrawal Rate from my main portfolio in a bad sequence. Until the portfolio recovers I plan to do 2% WR from my Portfolio and 2% from my cash. After the portfolio recovers I will revert to 4% from my main portfolio.

Is this still considered the "bucket strategy"? I am thinking not since most people I know have some cash set aside.
Muffin Master
Posts: 45
Joined: Wed Sep 05, 2018 3:00 pm

Re: The “Bucket Strategy” is ineffective (ERN)

Post by Muffin Master »

Living out of my bond portfolio in retirement is smart rather than my equity portfolio. I will not embrace SORR. Protect my income machine when possible.

Rebalance equality portfolio on rules to grow with inflation there by allowing your bond portfolio % to free float. Bank my real profits from equity by de-risking.

Review methodology every so often. Add or remove risk if needed. Correct my mistakes.

In the long run I think this will beat the 50/50 with rebalancing but not by any great amount for retirement portfolios. The review does add an element of unknown risk. I added it because I do not trust any mythology with my life..... Yes, behavior.

The 50/50 with rebalancing and no withdrawal rate would win probably. In any case its a fine portfolio choice too.

BackTesting is not the definitive absolute answer. At best is gives a warm and fuzzy feeling. All the testing methods have their shortcoming.

Unfortunately, all the awards for the perfect retirement portfolio are given, posthumously!
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by averagedude »

The "bucket strategy" is nothing but mental accounting. Instead of strategies, we should be thinking about the "proper asset allocation".
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by randomguy »

stocknoob4111 wrote: Thu Jan 26, 2023 9:31 pm My strategy is to just have some cash pool set aside to reduce the WIthdrawal Rate from my main portfolio in a bad sequence. Until the portfolio recovers I plan to do 2% WR from my Portfolio and 2% from my cash. After the portfolio recovers I will revert to 4% from my main portfolio.

Is this still considered the "bucket strategy"? I am thinking not since most people I know have some cash set aside.
Yes that is a bucket scheme. All bucket schemes have a couple things in common
a) piles of money
b) money only flows one way
c) you have rules for moving money around based on market conditions.
C is where every bucket scheme differs which makes them hard to say specifics about.

Again buckets aren't some horrible thing. They just don't do anything noticeable. If a 1929/1966/2000 sequence starts up tomorrow, if you have 3-10 years in cash with a special name or if you shove that money into your portfolio isn't going to make a noticeable difference. You are not able to avoid SORR either way.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by dbr »

randomguy wrote: Thu Jan 26, 2023 10:09 pm
Yes that is a bucket scheme. All bucket schemes have a couple things in common
a) piles of money
b) money only flows one way

When the image of pipelines connecting storage tanks came into my mind it wasn't clear that it has to be gravity flow with tanks at successively lower elevations, but I think you are correct about this.

c) you have rules for moving money around based on market conditions.
C is where every bucket scheme differs which makes them hard to say specifics about.

I would say you only have a buckets scheme if in fact you do have rules for how to move the money in all possible situations. Without that it isn't buckets but just a tally of assets divided up arbitrarily.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by protagonist »

"I was puzzled because I was under the impression that a simple Strategic Asset Allocation (SAA) seems to have far fewer moving parts than a bucket strategy, where you must constantly decide what bucket flows where and when to replenish and rebalance the cash bucket; effectively a form of market timing that is anything but simple."

Perhaps I don't understand what the author is getting at when he speaks of a "bucket strategy" , but the way I use a bucket approach is extremely simple, and does not require replenishment, rebalancing, market timing etc. I'm not incredibly rich. But as a retiree I am as confident as one can be that my "cash bucket", if invested in inflation-protected treasury bonds (I-bonds and TIPS ladder), will outlive me without causing any significant downturn in my lifestyle, and my lifestyle pleases me. That is all I have to know. Of course it is not perfect...nothing in life is 100% certain....but I am more certain of this than if I invested that portion of my assets in any other way. The rest of my money (the other "bucket") is invested in broad based stock index funds, and I consider that my gambling money. Like a smart casino-goer, I don't gamble with money I can't afford to lose. Maybe my stock gambles will make me rich, or maybe I will lose it all, but my lifestyle which I am content with should not be compromised, and ultimately, barring extraordinary events (that no alternate investment strategy will protect against), I can live my retirement free from worry . It can't get simpler than that.

If you are 60/40, or 30/70, or 70/30, or whatever, and the stock market crashes (I mean REALLY crashes), and on top of that your bonds tumble as well, and as a retiree your only other source of income is your social security check (which you hope will continue for as long as you live), will you still have enough to live comfortably? What if the market doesn't bounce back in a few years? In a few decades?? Will you panic? Are you sure?

Other asset allocation plans based on percentages come with baseless assumptions , like that bonds will be protective in the case of a stock market downturn (that didn't seem to work well in 2022), that stocks (and bonds) will eventually rebound during your lifetime following a crash, that a crash worse than 1929 in the next few decades is highly unlikely, etc. In other words, that the foreseeable future (to one's investment horizon) will not be worse, or even significantly different, than the past century or so. Those are pretty big assumptions. It's probably fine if you have a good reliable source of income for many years to come so you can bounce back following a massive loss (though that can also change), but for many retirees it is a different story. And managing your assets in times of crisis with such a strategy can seriously challenge your resolve. It is far from simple.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by TinyHouse »

randomguy wrote: Thu Jan 26, 2023 10:09 pm Again buckets aren't some horrible thing. They just don't do anything noticeable. If a 1929/1966/2000 sequence starts up tomorrow, if you have 3-10 years in cash with a special name or if you shove that money into your portfolio isn't going to make a noticeable difference. You are not able to avoid SORR either way.
Bingo.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by WoodSpinner »

So here is a question that puzzles me:

There doesn’t seem to be a common definition of what a Bucket Strategy is — frankly I don’t know if I have a Bucket Strategy a Liability Matching Portfolio or some Interim Hybrid.

Is there a substantive difference between a Bucket approach and a Liability Matching Portfolio during Decimulation (assuming similar durations)?

For instance my Bucket (or LMP) strategy looks like this:

Image

I maintain a 60/40 AA across the portfolio, rebalance based on 5% bands BUT maintain at a minimum 10 years of Expected Cashflow needs in Bonds.
  1. Behaviorally I have been fine during the 3 Bear Markets (2018, 2020, 2022) since I retired.
  2. I strongly value being able to Spend during my Go Go Years of Retirement and don't want to worry about how the Market is doing.
  3. Overall, my focus is on Spending Down my Portfolio to meet my Retirement Goals and Estate Plans -- I don't need the portfolio to grow beyond those needs.
  4. I am able to DURATION match my bonds to my cashflow needs.
  5. I purchase a new bond each year (for Year+2) Cashflow needs and hold it to maturity. Funding comes from either Bucket-2 or from Stocks depending on my Rebalancing Bands.
  6. If necessary I will sell stocks to refill Bucket-2 to insure I have 10 years of Cashflow in low-risk investments. This may shift my AA upwards but my Ability to take on Risk also increases as I move towards claiming SS at 70.
Personally, I think both the Bucket Strategy and LMP approach are fairly similar — at least in concept of using a Duration Matching approach to guide your investments. There may be some minor differences in investment styles (individual bonds, CDs, MYGAs vs. funds) but nothing major (IMHO). I will admit that 2022 has made me consider shifting to a more traditional LMP portfolio of Treasuries or TIPs but am not quite ready to make that change.

I do plan to change my AA over time since my Ability and Willingness will change as the Cashflow my Portfolio has to support changes. By using a Bottom’s-Up Asset Allocation I have a much better visibility into my Need and Ability to take risks. Behaviorally, I find my Willingness to take risks is more heartfelt once I know my Retirement Goals/Estate Plans are realistically covered. I use the Funded Ratio as a key metric to help me decide when something needs to change (many thanks to Bobcat2 for introducing the concept to me).


So, is this a Liability Matching Portfolio? A Bucket Strategy? Something else?


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Re: The “Bucket Strategy” is ineffective (ERN)

Post by randomguy »

WoodSpinner wrote: Thu Jan 26, 2023 11:11 pm


So, is this a Liability Matching Portfolio? A Bucket Strategy? Something else?


WoodSpinner
Neither:).
At a super high level

Liability portfolio = you match your liabilities and you spend them down without market timing rules. There is no need to buy more unless your liability changes. If I will be getting 40k/year of SS in 5 years, building a 5 year bond ladder with like 200k of TIPS matches my liability.

Bucket - have different accounts and move money around based on market timing rules.

You could call your system a bucket but given your refill rule it would not match what most people expect. You are selling stocks in down markets and buying bonds which is the opposite of what most people expect when they hear about bucket schemes.

There isn't some official definitions of these things. It is more for connivence when talking about them.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Muffin Master »

I think the Bucket Strategies being referred to here are those of Ray Lucia 3 bucket and its variant as well as the 2 bucket Grangaard strategy and it variants. Both of these strategies are reviewed in McClung's book. Both are considered to underperform in backtest when placed under periods of stress. Both have very elaborate methods of rebalancing and in the case of Lucia he is a little unsure if he understands it correctly or has an accurate guide.
I agree from these readings that these strategies are not desirable however to lump all bond/stock portfolios that do not use traditional rebalancing as bucket portfolios is not accurate in my option. I believe most ppl use tradition rebalancing with some sort of stock/bond ratio. It is the default for BH strategy as well, I believe. It serves both committees, allocation and distribution, very well. As an allocation portfolio its one of the best, IMHO, however if you are sporting a 2-6% withdrawal ratio it might not be the very best in that case.

I am a big fan of McClung's work. I am bias.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by retireIn2020 »

The bucket strategy is nothing more than withdrawal strategy for retirees living off of their portfolio.

I consider my withdraw/rebalancing strategy to be the bucket approach. However, my 50% safe assets are in stable value and MYGA's earning an average of over 4% (in todays world), and 50% "Risk" assets are a mix of total stock market and ex-us.

Here's my example of how it works for me.
I'm retired and drawing from my portfolio which is 50/50 AA where the 50% "Safe" assets never get rebalanced into the "Risk" assets.

As I draw down the portfolio from the safe assets only, in theory the portfolio should become unbalanced and require selling "Risk" assets to bring it back to 50/50 at a triggering event (like Jan 1, or your birthday, 5% etc.).

If the Risk assets decline over time while withdrawing from the safe assets during the same period, the portfolio remains somewhat balanced.

If the risk assets grow, then whatever trigger used to rebalance the portfolio determines how much of the securities are needed to sell and add to the safe assets.

The only difference from this and a non-bucket 3 fund approach (of selling stocks and bonds at the same time based on AA) is where you draw your income, and the benefit is not selling stocks in declining markets. Remember, this is a retiree withdrawing and not and accumulator!

In this thread I hear argument's like "with the bucket approach you can't buy stocks in a downturn", then at the same time call bucketing market timing! Geeze, contradiction anyone? I'm retired and done buying stocks, I'm selling!

Get it through your thick skulls, the bucket approach is nothing more than a withdrawal strategy! :D uh, sorry I get a little overzealous.

I'm not familiar with ERN or the youtube influencer posted earlier, but it appears they make it more complicated than need be.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by nedsaid »

marcopolo wrote: Thu Jan 26, 2023 8:56 pm
nedsaid wrote: Thu Jan 26, 2023 8:18 pm
randomguy wrote: Thu Jan 26, 2023 7:00 pm
nedsaid wrote: Thu Jan 26, 2023 5:20 pm
The reason for a bucket strategy is more psychological than mathematical. It is a way of allowing the stocks in your portfolio to recover from market corrections and bear markets. Doesn't seem like a good strategy to sell stocks near the bottom of a bear market to raise cash to live on. There is also a strategy of withdrawing from stocks in good years for the stock market and from bonds during bad years.

There are any number of withdrawal strategies. They all have their drawbacks. I have looked at most all of them.
Sure but don't you think it would be a good idea to BUY stocks at the bottom like the fixed AA does? You aren't going to be selling stocks in bear markets. You will be selling bonds.

Lets look at the super simple case. 25x of expenses
a) 25x 50/50
b) 5 years in cash, 20x invested 62.5%/37.5%. We spend cash when the portfolio is below starting value

So 2000 rolls around. Where are we after 5 years
a) 1million (all nominal to keep it easy)->937k. Portfolio bottom out at ~800k
b) 800k->897k. You will also have about 6k of cash left. It bottom out at ~645k and you had about 100k in cash.

So despite not having to "sell" stocks, you basically had a lower net worth throughout this time period. The rising equity path of the buckets sort of screwed you as when 2002 hit you had a higher exposure to stocks and paid the price. Now the higher equity allocation does help out later on.

Fast forward to 2023 and the the 50/50 person has 1.027m and the bucket person has 1.087m. The slightly higher stock allocation paid off in slightly more money. Of course you had a bumpier ride in 2007-2009. If you would have refilled your cash bucket at any points, the difference would have dropped.
I am still thinking about withdrawal strategies in retirement. Still thinking about the form the portfolio would take when I finally decide to retire.

Don't think I have ever rebalanced from Bonds to Stocks, it has always been the other way around. The closest I did to that was a full year of putting all of my new funds into Stocks. Hard to imagine that I would want to rebalance into Stocks in retirement.

So I will cross that bridge when I come to it. Still researching my different options.
But, that is precisely why a disciplined static allocation strategy is tough to beat. It kind of forces you to buy stocks when they are down, and sell them when they are up, but without having to do so based on some gut feel.

A simple withdrawal strategy will provide as good or better outcomes without adding complexity of thinking about buckets, how to fill them, etc.

A withdrawal plan could as simple as this:

1) Choose an asset allocation target (e.g., 60/40)
2) Turn off re-investments in taxable account, use it for spending.
3) If more money is needed, sell some of the asset class that is over-weighted.
4) Use a trigger band (e.g. 5%) to rebalance, if (2) and (3) don't do the job. (This will happen pretty rarely, last time for us was March 2020)

No need to agonize over when to fill buckets, when to shift into/out of equities, etc.
There is little evidence that adding the complexity of buckets will do any better than the simple plan above.

Even though things looked pretty bleak in march 2020, I had no problems selling some fixed income to buy more equities because there was a well defined (yet simple) criteria for doing so. One of the problems with the bucket/cash cushion approach is that most people employing them can't articulate their specific plan for when/how they will refill them. So, it is left to some ad-hoc real-time decision making, which often leads to behavioral errors.
The purpose of the bucket filled with Short Term Bonds would be to enable me to leave the rest of the portfolio alone during Bear markets, most of the time 3-4 years is enough to ride out most Bear markets and market corrections. During good market years, I would probably just take withdrawals from the main portfolio and leave the short term bucket alone.

Not trying to be fancy here, just giving Stocks some time to recover from bad markets. I envision the main part of the portfolio to be invested for moderate risk and the short term bucket invested for low risk. Two buckets, nothing fancy. If the Bear market lasted longer that 3-4 years and the short term bucket were exhausted, I would then take money from Bonds which would accomplish much the same thing as rebalancing into Stocks.

Don't understand why people think this is so complex. Bucket one would be a moderate portfolio and bucket two would have 3-4 years worth of withdrawals in Short Term Bonds and Short Term TIPS. Not going to do Ray Lucia's strategy with 3-4 buckets. The idea is to minimize selling Stocks in bad markets, that's all.

Just made a quick comment regarding buckets. Amazing that folks have commented on my post and not Garland's which was lengthier and more detailed. In any case, I plan to have a less aggressive portfolio than his 75% Stocks and 25% Bonds.
I am just trying the most psychologically easy withdrawal strategy.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by placeholder »

billthecat wrote: Thu Jan 26, 2023 10:24 am
Call_Me_Op wrote: Thu Jan 26, 2023 9:35 am
billthecat wrote: Wed Jan 25, 2023 9:47 am I'm just once again thankful for Safari's reader view to present the article as it should be without all the ads and page clutter.
Can you explain this to me? I have a vestibular issue that makes busy pages painful to read - and would like that feature. Is Safari a browser?
Yes, it's the browser that comes as part of macOS, iOS, and iPadOS
Firefox for pc also supports reader view.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

Any strategy that is designed to do different things based on recent market performance raises red flags for me.

Rather than saying you'll withdraw from your cash bucket in a bear market and creating arbitrary rules that require subjective decisions during emotionally stressful times, why not just do something like a 60/40 portfolio with the 40% being cash, always drawing from the heavier asset? That way you've got your 10 years of cash.

It's simple, objective, and most importantly, not any more detrimental than your arbitrary "bucket" approach and doesn't introduce the portfolio to more potential volatility after the market has gone down like the bucket approach does.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by nedsaid »

Muffin Master wrote: Thu Jan 26, 2023 11:50 pm I think the Bucket Strategies being referred to here are those of Ray Lucia 3 bucket and its variant as well as the 2 bucket Grangaard strategy and it variants. Both of these strategies are reviewed in McClung's book. Both are considered to underperform in backtest when placed under periods of stress. Both have very elaborate methods of rebalancing and in the case of Lucia he is a little unsure if he understands it correctly or has an accurate guide.
I agree from these readings that these strategies are not desirable however to lump all bond/stock portfolios that do not use traditional rebalancing as bucket portfolios is not accurate in my option. I believe most ppl use tradition rebalancing with some sort of stock/bond ratio. It is the default for BH strategy as well, I believe. It serves both committees, allocation and distribution, very well. As an allocation portfolio its one of the best, IMHO, however if you are sporting a 2-6% withdrawal ratio it might not be the very best in that case.

I am a big fan of McClung's work. I am bias.
I went to a couple of Ray Lucia's seminars and somewhere I have an autographed book of his. The concept was interesting but as interest rates continued to fall, it seemed his strategy got harder and harder to execute. From memory, it seemed that the lower the interest rates, the more tricks and complexity he had to do in order to make it all work. In fact, it would be fair to say that very low interest rates pretty much blew up his strategy. As I recall, as interest rates fell he resorted to using Single Premium Immediate Annuities for the safe bucket and resorted to non-Traded REITs to boost yield. It got to be sort of a Rube Goldberg device and I lost interest in all of the buckets.

As others have pointed out, buckets are an attempt at a liability matching strategy.

The takeaway is that very low interest rates had a negative effect upon all withdrawal strategies, even a Safe Withdrawal Rate from a portfolio. The lower interest rates are, the lower the SWR. Even liability matching strategies got to be harder to execute with very low interest rates, even Bobcat2 temporarily threw in the towel and admitted that retirees might have to boost Stock allocations a bit. Bobcat2 also talked for a brief time about funds that use options strategies. The level of interest rates and whether real TIPS yields are positive or negative play a big role in the liability matching strategies.

We have discussed the 4% Safe Withdrawal Rate and the Trinity study, decided that 4% was too high and adjusted it down to 3.5% SWR, soon 3% was the new 4%, and then argued over whether a 2.7% SWR was still too high. Hence my jokes regarding Zero SWR.

Believe me, I have looked over the various strategies, agonized over them and came to no clear conclusions about what was best. It boils down to the level of interest rates, both real and nominal, and the sequence of returns problem in retirement. Dr. Wade Pfau bravely entered such discussions on withdrawal strategies and took a lot of criticism. We haven't even touched on Bill Bernstein's heckfire, brimstone, and eternal darnnation warnings regarding inflation and Single Premium Immediate Annuities. There are no easy answers.

So not doing a 3-4 bucket strategy, if I do a bucket strategy, it will be just two. I will likely use a combination of strategies here. If I had to pick right now, probably a mix of duration matching with TIPS and a variable withdrawal rate. I would likely not annuitize anything right now. Haven't even decided for certain what the portfolio will look like in retirement. Don't know for sure of my default asset allocation. Lots of things in the air right now.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by nedsaid »

Triple digit golfer wrote: Fri Jan 27, 2023 3:11 am Any strategy that is designed to do different things based on recent market performance raises red flags for me.

Rather than saying you'll withdraw from your cash bucket in a bear market and creating arbitrary rules that require subjective decisions during emotionally stressful times, why not just do something like a 60/40 portfolio with the 40% being cash, always drawing from the heavier asset? That way you've got your 10 years of cash.

It's simple, objective, and most importantly, not any more detrimental than your arbitrary "bucket" approach and doesn't introduce the portfolio to more potential volatility after the market has gone down like the bucket approach does.
So you are using a short term bucket of 10 years rather than 3-4 years when markets get really bad. That is really what you are doing. Withdrawing from Cash when it is the heavy asset sounds to me like a bucket strategy with better sounding semantics. You are still taking Cash out when the Stock Market is down a whole lot. In theory, that 60/40 should be continually rebalanced but you seem to be saying to just let the allocation ride.

Not saying what you are suggesting is a bad idea, there is good sense behind it. The thing is you can't solve market volatility with better semantics. Saying that your method is objective and that my method is arbitrary just doesn't cut it. That is just your opinion. Also want to raise the point that markets are dynamic, are you saying you will absolutely stick to your strategy at all costs despite what the market is doing? Even adjusting withdrawal rates could be considered arbitrary and doing different things based on recent market performance.

Nothing is perfect, there are drawbacks to any withdrawal strategy. Clever phrasing doesn't negate that.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

nedsaid wrote: Fri Jan 27, 2023 3:47 am
Triple digit golfer wrote: Fri Jan 27, 2023 3:11 am Any strategy that is designed to do different things based on recent market performance raises red flags for me.

Rather than saying you'll withdraw from your cash bucket in a bear market and creating arbitrary rules that require subjective decisions during emotionally stressful times, why not just do something like a 60/40 portfolio with the 40% being cash, always drawing from the heavier asset? That way you've got your 10 years of cash.

It's simple, objective, and most importantly, not any more detrimental than your arbitrary "bucket" approach and doesn't introduce the portfolio to more potential volatility after the market has gone down like the bucket approach does.
So you are using a short term bucket of 10 years rather than 3-4 years when markets get really bad. That is really what you are doing. Withdrawing from Cash when it is the heavy asset sounds to me like a bucket strategy with better sounding semantics. You are still taking Cash out when the Stock Market is down a whole lot. In theory, that 60/40 should be continually rebalanced but you seem to be saying to just let the allocation ride.

Not saying what you are suggesting is a bad idea, there is good sense behind it. The thing is you can't solve market volatility with better semantics. Saying that your method is objective and that my method is arbitrary just doesn't cut it. That is just your opinion. Also want to raise the point that markets are dynamic, are you saying you will absolutely stick to your strategy at all costs despite what the market is doing? Even adjusting withdrawal rates could be considered arbitrary and doing different things based on recent market performance.

Nothing is perfect, there are drawbacks to any withdrawal strategy. Clever phrasing doesn't negate that.
No, I am saying to maintain the 60/40 portfolio. Always draw from the heavier asset. When the market falls significantly, this will have the investor drawing from cash.

I prefer to not have a plan that has me making decisions. I prefer to have a plan and then all I have to do is execute. No subjectivity, no decision-making when the market declines 40%.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by nedsaid »

I don't know. I keep hearing that my suggestion of a two bucket strategy is somehow using arbitrary adjustments, is market timing, and emotion based. Why the other posters are completely logical, completely unemotional, completely objective in their approach; to which I say BALONEY!

It seems like folks have forgotten about Sheepdog's epic thread regarding keeping his emotions in check during the 2008-2009 downturn which scared even the mighty Nedsaid. I was scared and I was scared spitless. Sheepdog was not alone. The idea that somehow that having the perfect withdrawal strategy will shield an investor from emotional angst during a terrible bear market is just not realistic. Every withdrawal strategy has its drawbacks and all of us have emotions. The best we can do is plan in advance best we can but in the final analysis, I reserve the right to do what I believe to be the right thing whenever I need to.

Hopefully I will exhibit correct market behavior when bad stuff happens. One way of planning for this in advance is having a short term bucket with assets with low volatility that I can draw from and leave my Stocks alone. When emotions are running high, I can take withdrawals from the safer bucket, I am not going to care what research says. Just doing the very best I can to avoid panic selling of my Stocks when things look really, really bad.

Back in 2008-2009, I just let things ride knowing that I had probably 15 years until retirement and knowing that I was still contributing to my retirement kitty. At age 63, with retirement getting close, things look different now than back then. When I am retired, I suspect it will look different still. Having 3-4 years of safer assets I can draw from is a pretty powerful psychological tool that would help me stay the course when markets go bad. It amounts to you gotta do what you gotta do to protect one from one's self, I realize the raw power of human emotion, people who do not respect that are just kidding themselves.

Keep in mind that I haven't even settled upon a withdrawal strategy or even my asset allocation in retirement. Just a lot of thinking aloud here on the forum.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by nedsaid »

Triple digit golfer wrote: Fri Jan 27, 2023 3:54 am
nedsaid wrote: Fri Jan 27, 2023 3:47 am
Triple digit golfer wrote: Fri Jan 27, 2023 3:11 am Any strategy that is designed to do different things based on recent market performance raises red flags for me.

Rather than saying you'll withdraw from your cash bucket in a bear market and creating arbitrary rules that require subjective decisions during emotionally stressful times, why not just do something like a 60/40 portfolio with the 40% being cash, always drawing from the heavier asset? That way you've got your 10 years of cash.

It's simple, objective, and most importantly, not any more detrimental than your arbitrary "bucket" approach and doesn't introduce the portfolio to more potential volatility after the market has gone down like the bucket approach does.
So you are using a short term bucket of 10 years rather than 3-4 years when markets get really bad. That is really what you are doing. Withdrawing from Cash when it is the heavy asset sounds to me like a bucket strategy with better sounding semantics. You are still taking Cash out when the Stock Market is down a whole lot. In theory, that 60/40 should be continually rebalanced but you seem to be saying to just let the allocation ride.

Not saying what you are suggesting is a bad idea, there is good sense behind it. The thing is you can't solve market volatility with better semantics. Saying that your method is objective and that my method is arbitrary just doesn't cut it. That is just your opinion. Also want to raise the point that markets are dynamic, are you saying you will absolutely stick to your strategy at all costs despite what the market is doing? Even adjusting withdrawal rates could be considered arbitrary and doing different things based on recent market performance.

Nothing is perfect, there are drawbacks to any withdrawal strategy. Clever phrasing doesn't negate that.
No, I am saying to maintain the 60/40 portfolio. Always draw from the heavier asset. When the market falls significantly, this will have the investor drawing from cash.

I prefer to not have a plan that has me making decisions. I prefer to have a plan and then all I have to do is execute. No subjectivity, no decision-making when the market declines 40%.
Again, clever semantics is not a strategy. Saying you are not making decisions does not negate that your are still making decisions. You are maintaining a 60/40 portfolio without rebalancing, in other words maintaining a portfolio by not maintaining it. I don't know how to better state it. I think you are fooling yourself here and playing word games.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

nedsaid wrote: Fri Jan 27, 2023 4:14 am I don't know. I keep hearing that my suggestion of a two bucket strategy is somehow using arbitrary adjustments, is market timing, and emotion based. Why the other posters are completely logical, completely unemotional, completely objective in their approach; to which I say BALONEY!

It seems like folks have forgotten about Sheepdog's epic thread regarding keeping his emotions in check during the 2008-2009 downturn which scared even the mighty Nedsaid. I was scared and I was scared spitless. Sheepdog was not alone. The idea that somehow that having the perfect withdrawal strategy will shield an investor from emotional angst during a terrible bear market is just not realistic. Every withdrawal strategy has its drawbacks and all of us have emotions. The best we can do is plan in advance best we can but in the final analysis, I reserve the right to do what I believe to be the right thing whenever I need to.

Hopefully I will exhibit correct market behavior when bad stuff happens. One way of planning for this in advance is having a short term bucket with assets with low volatility that I can draw from and leave my Stocks alone. When emotions are running high, I can take withdrawals from the safer bucket, I am not going to care what research says. Just doing the very best I can to avoid panic selling of my Stocks when things look really, really bad.

Back in 2008-2009, I just let things ride knowing that I had probably 15 years until retirement and knowing that I was still contributing to my retirement kitty. At age 63, with retirement getting close, things look different now than back then. When I am retired, I suspect it will look different still. Having 3-4 years of safer assets I can draw from is a pretty powerful psychological tool that would help me stay the course when markets go bad. It amounts to you gotta do what you gotta do to protect one from one's self, I realize the raw power of human emotion, people who do not respect that are just kidding themselves.

Keep in mind that I haven't even settled upon a withdrawal strategy or even my asset allocation in retirement. Just a lot of thinking aloud here on the forum.
That's what 60/40 with the 40 in cash does. In reality, I doubt you'd be pulling from the cash and have high emotions when it's below 40% anyway. If below 40% it means stocks are doing well and you'd be happy to withdraw from them. If above 40%, stocks are not doing well and you'd pull from cash.

The part that I can never reconcile is drawing down the cash to well under the 40% or whatever the desired amount is. If one needs a bucket of cash to sleep at night, why would that same person be totally fine drawing it down to a small level, thereby greatly increasing portfolio volatility?
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

nedsaid wrote: Fri Jan 27, 2023 4:18 am
Triple digit golfer wrote: Fri Jan 27, 2023 3:54 am
nedsaid wrote: Fri Jan 27, 2023 3:47 am
Triple digit golfer wrote: Fri Jan 27, 2023 3:11 am Any strategy that is designed to do different things based on recent market performance raises red flags for me.

Rather than saying you'll withdraw from your cash bucket in a bear market and creating arbitrary rules that require subjective decisions during emotionally stressful times, why not just do something like a 60/40 portfolio with the 40% being cash, always drawing from the heavier asset? That way you've got your 10 years of cash.

It's simple, objective, and most importantly, not any more detrimental than your arbitrary "bucket" approach and doesn't introduce the portfolio to more potential volatility after the market has gone down like the bucket approach does.
So you are using a short term bucket of 10 years rather than 3-4 years when markets get really bad. That is really what you are doing. Withdrawing from Cash when it is the heavy asset sounds to me like a bucket strategy with better sounding semantics. You are still taking Cash out when the Stock Market is down a whole lot. In theory, that 60/40 should be continually rebalanced but you seem to be saying to just let the allocation ride.

Not saying what you are suggesting is a bad idea, there is good sense behind it. The thing is you can't solve market volatility with better semantics. Saying that your method is objective and that my method is arbitrary just doesn't cut it. That is just your opinion. Also want to raise the point that markets are dynamic, are you saying you will absolutely stick to your strategy at all costs despite what the market is doing? Even adjusting withdrawal rates could be considered arbitrary and doing different things based on recent market performance.

Nothing is perfect, there are drawbacks to any withdrawal strategy. Clever phrasing doesn't negate that.
No, I am saying to maintain the 60/40 portfolio. Always draw from the heavier asset. When the market falls significantly, this will have the investor drawing from cash.

I prefer to not have a plan that has me making decisions. I prefer to have a plan and then all I have to do is execute. No subjectivity, no decision-making when the market declines 40%.
Again, clever semantics is not a strategy. Saying you are not making decisions does not negate that your are still making decisions. You are maintaining a 60/40 portfolio without rebalancing, in other words maintaining a portfolio by not maintaining it. I don't know how to better state it. I think you are fooling yourself here and playing word games.
Of course one would rebalance in my scenario.

My scenario is really simple. Maintain the 60/4 portfolio. Have an IPS and follow it. Have nothing in the IPS allow for decisions to be made later. Decisions are made in the IPS and then during turmoil, your only job is to follow it. Which, I admit, can probably be very difficult. But it's better than not having a plan or one that says figure it out at the time based on how I'm feeling or how the market is doing.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by nedsaid »

Triple digit golfer wrote: Fri Jan 27, 2023 4:25 am
nedsaid wrote: Fri Jan 27, 2023 4:18 am
Triple digit golfer wrote: Fri Jan 27, 2023 3:54 am
nedsaid wrote: Fri Jan 27, 2023 3:47 am
Triple digit golfer wrote: Fri Jan 27, 2023 3:11 am Any strategy that is designed to do different things based on recent market performance raises red flags for me.

Rather than saying you'll withdraw from your cash bucket in a bear market and creating arbitrary rules that require subjective decisions during emotionally stressful times, why not just do something like a 60/40 portfolio with the 40% being cash, always drawing from the heavier asset? That way you've got your 10 years of cash.

It's simple, objective, and most importantly, not any more detrimental than your arbitrary "bucket" approach and doesn't introduce the portfolio to more potential volatility after the market has gone down like the bucket approach does.
So you are using a short term bucket of 10 years rather than 3-4 years when markets get really bad. That is really what you are doing. Withdrawing from Cash when it is the heavy asset sounds to me like a bucket strategy with better sounding semantics. You are still taking Cash out when the Stock Market is down a whole lot. In theory, that 60/40 should be continually rebalanced but you seem to be saying to just let the allocation ride.

Not saying what you are suggesting is a bad idea, there is good sense behind it. The thing is you can't solve market volatility with better semantics. Saying that your method is objective and that my method is arbitrary just doesn't cut it. That is just your opinion. Also want to raise the point that markets are dynamic, are you saying you will absolutely stick to your strategy at all costs despite what the market is doing? Even adjusting withdrawal rates could be considered arbitrary and doing different things based on recent market performance.

Nothing is perfect, there are drawbacks to any withdrawal strategy. Clever phrasing doesn't negate that.
No, I am saying to maintain the 60/40 portfolio. Always draw from the heavier asset. When the market falls significantly, this will have the investor drawing from cash.

I prefer to not have a plan that has me making decisions. I prefer to have a plan and then all I have to do is execute. No subjectivity, no decision-making when the market declines 40%.
Again, clever semantics is not a strategy. Saying you are not making decisions does not negate that your are still making decisions. You are maintaining a 60/40 portfolio without rebalancing, in other words maintaining a portfolio by not maintaining it. I don't know how to better state it. I think you are fooling yourself here and playing word games.
Of course one would rebalance in my scenario.

My scenario is really simple. Maintain the 60/40 portfolio. Have an IPS and follow it. Have nothing in the IPS allow for decisions to be made later. Decisions are made in the IPS and then during turmoil, your only job is to follow it. Which, I admit, can probably be very difficult. But it's better than not having a plan or one that says figure it out at the time based on how I'm feeling or how the market is doing.
Your comments need clarification. You talk about taking money out of the heavy asset. If you continually rebalance your portfolio, Stocks by definition will be where your withdrawals will come from. I am pretty certain that is not what you are saying. If you are taking regular withdrawals from a rebalanced portfolio, you are taking withdrawals from both Stocks and Bonds but in different proportions according to how the market behaves. It also matters how often you are rebalancing. You could also use withdrawals as a means of keeping the portfolio in a 60/40 balance, in that case your comments about withdrawing from the heavier asset makes more sense but there would have to be a pretty dramatic shift in the market for the withdrawals to come 100% from Stocks or 100% from Cash. It would seem that most of the time, you would be taking some from each in varying proportions. There is more complexity here than you are letting on.

I believe in an Investment Policy Statement. I agree that it is best to have planned out in advance what you will do in bad markets. It is also best to have a portfolio designed to weather bad markets. In real life and with human emotions involved, it is much easier said than done. Plus there are outside forces other than market conditions that can upset best laid plans. Things like a bad diagnosis from a Doctor, a big event like a hurricane that does big damage to your home, a death in the family. Even with a perfect IPS that takes in to account all possible market scenarios, you still have these potential events in your personal life.

Pretty much, we can't guard against every potential contingency. The best we can do is guard against the most likely risks. So you never will have a situation where the IPS will do all the decision making for you. There is also a point at which markets can get so terrible that even the best of us will feel the pain. Some of us have better pain tolerance than others.

Your plan isn't a bad one, in fact it might be pretty good. There are drawbacks to whatever strategy that you come up with, nothing is perfect. I keep thinking of the late Don Rumsfeld's comment regarding the known knowns. the known unknowns, and the unknown unknowns. I wish I had the same certainty and belief in my plan that you do in yours. Whether that certainty is soundly based, I will leave it up to you to decide. How do I plan against the unknown unknowns, guard against risks that are real but that I don't even know about?
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by cbox »

nedsaid wrote: Fri Jan 27, 2023 4:14 am Back in 2008-2009, I just let things ride knowing that I had probably 15 years until retirement and knowing that I was still contributing to my retirement kitty. At age 63, with retirement getting close, things look different now than back then. When I am retired, I suspect it will look different still. Having 3-4 years of safer assets I can draw from is a pretty powerful psychological tool that would help me stay the course when markets go bad. It amounts to you gotta do what you gotta do to protect one from one's self, I realize the raw power of human emotion, people who do not respect that are just kidding themselves.
Well said.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Leesbro63 »

cbox wrote: Fri Jan 27, 2023 5:39 am
nedsaid wrote: Fri Jan 27, 2023 4:14 am Back in 2008-2009, I just let things ride knowing that I had probably 15 years until retirement and knowing that I was still contributing to my retirement kitty. At age 63, with retirement getting close, things look different now than back then. When I am retired, I suspect it will look different still. Having 3-4 years of safer assets I can draw from is a pretty powerful psychological tool that would help me stay the course when markets go bad. It amounts to you gotta do what you gotta do to protect one from one's self, I realize the raw power of human emotion, people who do not respect that are just kidding themselves.
Well said.
The problem is that Boomers have been trained that markets only go bad for 3-4 years. Yet a little longer history shows it can be way worse for way longer. How will it feel as that 1966 cash cushion diminishes and it's now 1970, but things won't improve for 10 more years?

The better solution is a lower SWR that you can live with through thick 'n thin.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by cbox »

Leesbro63 wrote: Fri Jan 27, 2023 6:00 am The problem is that Boomers have been trained that markets only go bad for 3-4 years. Yet a little longer history shows it can be way worse for way longer. How will it feel as that 1966 cash cushion diminishes and it's now 1970, but things won't improve for 10 more years?

The better solution is a lower SWR that you can live with through thick 'n thin.
Not sure why this should be an either-or situation rather than both. You can have a cash-cushion bucket, and you can have a lower SWR. Absolutes aren't necessary.

I haven't read every post in this thread, but it seems to me that it may have veered a while ago into a "someone's wrong on the internet" type of situation.

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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Stubbie »

I've been playing with buckets for years and it has come down to this question for me: Does it keep me from doing anything stupid?
Answer yes - do it!
Answer no - don't bother with the mental gymnastics.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by KlangFool »

Triple digit golfer wrote: Fri Jan 27, 2023 3:11 am Any strategy that is designed to do different things based on recent market performance raises red flags for me.

Rather than saying you'll withdraw from your cash bucket in a bear market and creating arbitrary rules that require subjective decisions during emotionally stressful times, why not just do something like a 60/40 portfolio with the 40% being cash, always drawing from the heavier asset? That way you've got your 10 years of cash.

It's simple, objective, and most importantly, not any more detrimental than your arbitrary "bucket" approach and doesn't introduce the portfolio to more potential volatility after the market has gone down like the bucket approach does.
Do you rebalance by selling cash to buy the stock when the stock drops 50%?

Do you set a minimum limit on your cash that you would stop rebalancing?

If you don't maintain your AA all the time by rebalancing, you are changing your AA based on market fluctuations.

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Re: The “Bucket Strategy” is ineffective (ERN)

Post by dbr »

I would comment that taking money out of the portfolio to buy an SPIA or to set up a long term TIPS ladder is probably not usefully thought of as a bucket. In reality these instruments are no longer investments but income streams not different from other income streams such as Social Security, pensions, other annuities already in place, remittances from a trust, or whatever.

Certainly having rather than not having such income streams changes the ante regarding how the invested assets are handled, but buckets are about how actual invested assets are handled from there rather than income streams being a bucket in any usual meaning of the idea.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by dknightd »

TinyHouse wrote: Wed Jan 25, 2023 9:44 am Well, Karsten and Fritz have been at it again. From where I sit, Karsten/ERN is correct, and the bucket strategy is pretty much useless and overly complex and doesn’t live up to its promises of shielding from SORR. I recommend actually reading the arguments before responding, it’s pretty well laid out. What do you think?

https://earlyretirementnow.com/2023/01/ ... s-part-55/
I finally got around to reading the blog post. I thought I'd post my thoughts before I read what others had to say.

What I got out of this is that sometimes (i.e. for some retirees in the past) the fixed allocation method did a little better than the bucket method. For other retirees, the bucket strategy was a little better. On average there was no benefit to using the bucket strategy (which could also be restated as: on average the fixed AA strategy was no better).

I think the key words are "little" and "average". We do not know what the future holds, so can not be sure that the results for an "average" retiree in the past will be the same for a specific retiree in the future. And of course what matters to us is our retirement, not the "average".

The good thing is, which ever method you choose the difference will be "little" (and impossible to predict). So you can more or less choose the method you prefer :happy
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by CloseEnough »

I am surprised this thread gets so much traction, and emotion. Lots of food for thought here.

I will continue to think about a modified bucket strategy. For investment and life planning, the buckets I continue to focus on are my bucket list and when I may kick the bucket. Two sides of the same coin.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by dbr »

CloseEnough wrote: Fri Jan 27, 2023 7:26 am I am surprised this thread gets so much traction, and emotion. Lots of food for thought here.

I will continue to think about a modified bucket strategy. For investment and life planning, the buckets I continue to focus on are my bucket list and when I may kick the bucket. Two sides of the same coin.
It gets traction because people understandably worry about staying solvent during retirement and being able to meet their needs. When a commentator or guru suggests a system that is represented to reduce risk people find that appealing and even wonder if not following the system is a mistake. This is especially true when one can cite some superficial thinking that seems convincing or at least comfortable even if in fact nothing special is accomplished. There is nothing wrong with arranging one's assets to feel more comfortable either. The question then becomes the other side of the coin as to whether a buckets arrangement is a mistake to follow. The good news is that it is not a big deal either way around, at least as long as one does not go to extremes.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Call_Me_Op »

billthecat wrote: Thu Jan 26, 2023 10:24 am
Call_Me_Op wrote: Thu Jan 26, 2023 9:35 am
billthecat wrote: Wed Jan 25, 2023 9:47 am I'm just once again thankful for Safari's reader view to present the article as it should be without all the ads and page clutter.
Can you explain this to me? I have a vestibular issue that makes busy pages painful to read - and would like that feature. Is Safari a browser?
Yes, it's the browser that comes as part of macOS, iOS, and iPadOS (see here). There are plenty of descriptions on the web (search for "safari reader view") but here's a recent one (which, ironically, is cluttered by ads and other distractions like social media links, "related posts" and the like :oops:).You can also customize the font used, font size, and background, and you can still zoom in / out as with the regular view. And you can print from the reader view, whether actual printing or saving to a PDF. It's the inline ads, slide overs, pop overs, and the like that interfere with, you know, actually reading the article that drive me nuts.

Before:
Image

After:
Image
Thanks btc. Unfortunately, I don't have a Mac so may not be able to take advantage of this.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by stocknoob4111 »

randomguy wrote: Thu Jan 26, 2023 10:09 pm Again buckets aren't some horrible thing. They just don't do anything noticeable. If a 1929/1966/2000 sequence starts up tomorrow, if you have 3-10 years in cash with a special name or if you shove that money into your portfolio isn't going to make a noticeable difference. You are not able to avoid SORR either way.
I don't quite understand how it doesn't do anything noticeable. If you avoid withdrawing your portfolio during an initial bad sequence it should mathematically make a difference.

I backtested my own scheme with the 2000 cycle and using my method resulted in a 20% higher ending balance in 2023. So that is proof that in at least one bad cycle having additional cash was superior. And that just makes mathematical sense to me.

Assumption - I retire in Jan 2000. In Simulation 1 I had just a single portfolio with equities, bonds and cash as a single pool and did withdrawals from that pool, rebalanced annually. In Simulation 2 I had a separate stash of cash that I lived off 2000-2003 and deferred withdrawals from my portfolio until it had recovered in 2004.

In this strategy I don't "replenish" any buckets, it's simply a strategy that has some cash to do an initial deferral of withdrawals for as long as possible. My doing this I allow the portfolio a chance to recover and in the process also reduce the absolute number of withdrawals which predictably results in a higher ending balance.

Periodic Withdrawals inflation adjusted: $40,000/yr in 2000 dollars

Simulation 1 :
Starting Balance: $952,000 (Jan 2000)
Ending Balance: $942,672 (Jan 2023)

https://tinyurl.com/54hx8xyd

Simulation 2 :
Starting Balance: $802,000 (Jan 2000)
Cash Pool: $150,000
Ending Balance: $1,209,318 (Jan 2023)
(Withdrawals deferred to start 2004, 2000-2003 living off cash)

https://tinyurl.com/yzwcw4jp

This makes perfect sense as it avoids SORR which is what we want.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by dknightd »

nedsaid wrote: Fri Jan 27, 2023 4:59 am How do I plan against the unknown unknowns, guard against risks that are real but that I don't even know about?
You can not. Insurance products might help. But I suspect even they will fail if an unknown unknown comes along. You just have to admit that life is risky! But it is better than the alternative.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

KlangFool wrote: Fri Jan 27, 2023 6:47 am
Triple digit golfer wrote: Fri Jan 27, 2023 3:11 am Any strategy that is designed to do different things based on recent market performance raises red flags for me.

Rather than saying you'll withdraw from your cash bucket in a bear market and creating arbitrary rules that require subjective decisions during emotionally stressful times, why not just do something like a 60/40 portfolio with the 40% being cash, always drawing from the heavier asset? That way you've got your 10 years of cash.

It's simple, objective, and most importantly, not any more detrimental than your arbitrary "bucket" approach and doesn't introduce the portfolio to more potential volatility after the market has gone down like the bucket approach does.
Do you rebalance by selling cash to buy the stock when the stock drops 50%?

Do you set a minimum limit on your cash that you would stop rebalancing?

If you don't maintain your AA all the time by rebalancing, you are changing your AA based on market fluctuations.

KlangFool
Yes.
No.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

nedsaid wrote: Fri Jan 27, 2023 4:59 am
Triple digit golfer wrote: Fri Jan 27, 2023 4:25 am
nedsaid wrote: Fri Jan 27, 2023 4:18 am
Triple digit golfer wrote: Fri Jan 27, 2023 3:54 am
nedsaid wrote: Fri Jan 27, 2023 3:47 am

So you are using a short term bucket of 10 years rather than 3-4 years when markets get really bad. That is really what you are doing. Withdrawing from Cash when it is the heavy asset sounds to me like a bucket strategy with better sounding semantics. You are still taking Cash out when the Stock Market is down a whole lot. In theory, that 60/40 should be continually rebalanced but you seem to be saying to just let the allocation ride.

Not saying what you are suggesting is a bad idea, there is good sense behind it. The thing is you can't solve market volatility with better semantics. Saying that your method is objective and that my method is arbitrary just doesn't cut it. That is just your opinion. Also want to raise the point that markets are dynamic, are you saying you will absolutely stick to your strategy at all costs despite what the market is doing? Even adjusting withdrawal rates could be considered arbitrary and doing different things based on recent market performance.

Nothing is perfect, there are drawbacks to any withdrawal strategy. Clever phrasing doesn't negate that.
No, I am saying to maintain the 60/40 portfolio. Always draw from the heavier asset. When the market falls significantly, this will have the investor drawing from cash.

I prefer to not have a plan that has me making decisions. I prefer to have a plan and then all I have to do is execute. No subjectivity, no decision-making when the market declines 40%.
Again, clever semantics is not a strategy. Saying you are not making decisions does not negate that your are still making decisions. You are maintaining a 60/40 portfolio without rebalancing, in other words maintaining a portfolio by not maintaining it. I don't know how to better state it. I think you are fooling yourself here and playing word games.
Of course one would rebalance in my scenario.

My scenario is really simple. Maintain the 60/40 portfolio. Have an IPS and follow it. Have nothing in the IPS allow for decisions to be made later. Decisions are made in the IPS and then during turmoil, your only job is to follow it. Which, I admit, can probably be very difficult. But it's better than not having a plan or one that says figure it out at the time based on how I'm feeling or how the market is doing.
Your comments need clarification. You talk about taking money out of the heavy asset. If you continually rebalance your portfolio, Stocks by definition will be where your withdrawals will come from. I am pretty certain that is not what you are saying. If you are taking regular withdrawals from a rebalanced portfolio, you are taking withdrawals from both Stocks and Bonds but in different proportions according to how the market behaves. It also matters how often you are rebalancing. You could also use withdrawals as a means of keeping the portfolio in a 60/40 balance, in that case your comments about withdrawing from the heavier asset makes more sense but there would have to be a pretty dramatic shift in the market for the withdrawals to come 100% from Stocks or 100% from Cash. It would seem that most of the time, you would be taking some from each in varying proportions. There is more complexity here than you are letting on.

I believe in an Investment Policy Statement. I agree that it is best to have planned out in advance what you will do in bad markets. It is also best to have a portfolio designed to weather bad markets. In real life and with human emotions involved, it is much easier said than done. Plus there are outside forces other than market conditions that can upset best laid plans. Things like a bad diagnosis from a Doctor, a big event like a hurricane that does big damage to your home, a death in the family. Even with a perfect IPS that takes in to account all possible market scenarios, you still have these potential events in your personal life.

Pretty much, we can't guard against every potential contingency. The best we can do is guard against the most likely risks. So you never will have a situation where the IPS will do all the decision making for you. There is also a point at which markets can get so terrible that even the best of us will feel the pain. Some of us have better pain tolerance than others.

Your plan isn't a bad one, in fact it might be pretty good. There are drawbacks to whatever strategy that you come up with, nothing is perfect. I keep thinking of the late Don Rumsfeld's comment regarding the known knowns. the known unknowns, and the unknown unknowns. I wish I had the same certainty and belief in my plan that you do in yours. Whether that certainty is soundly based, I will leave it up to you to decide. How do I plan against the unknown unknowns, guard against risks that are real but that I don't even know about?
I am saying to simply maintain the asset allocation, thereby always drawing from the heavier asset. If 62/38, draw from stocks until 60/40. If 58/42, draw from fixed income until 60/40. Rebalance when off 5%.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by KlangFool »

Triple digit golfer wrote: Fri Jan 27, 2023 8:24 am
KlangFool wrote: Fri Jan 27, 2023 6:47 am
Triple digit golfer wrote: Fri Jan 27, 2023 3:11 am Any strategy that is designed to do different things based on recent market performance raises red flags for me.

Rather than saying you'll withdraw from your cash bucket in a bear market and creating arbitrary rules that require subjective decisions during emotionally stressful times, why not just do something like a 60/40 portfolio with the 40% being cash, always drawing from the heavier asset? That way you've got your 10 years of cash.

It's simple, objective, and most importantly, not any more detrimental than your arbitrary "bucket" approach and doesn't introduce the portfolio to more potential volatility after the market has gone down like the bucket approach does.
Do you rebalance by selling cash to buy the stock when the stock drops 50%?

Do you set a minimum limit on your cash that you would stop rebalancing?

If you don't maintain your AA all the time by rebalancing, you are changing your AA based on market fluctuations.

KlangFool
Yes.
No.
Triple digit golfer,

1) Do you keep your emergency fund inside your portfolio?

2) So, are you saying that you are willing to rebalance away your emergency fund if the stock market drops 90%?

3) Or, you never plan for the possibility that the stock market can drops 90%?

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Re: The “Bucket Strategy” is ineffective (ERN)

Post by retiringwhen »

stocknoob4111 wrote: Fri Jan 27, 2023 7:58 am I don't quite understand how it doesn't do anything noticeable. If you avoid withdrawing your portfolio during an initial bad sequence it should mathematically make a difference.
ERN's article (and his entire SWR series) goes into great (excruciating?) detail about the trade-off. His point is that the SORR avoidance features of bucket strategies are not nearly as beneficial as they appear in theory and the opportunity costs in other market regimes are great. Like almost all forms of insurance, risk reduction has significant costs.

The bottom line question and the reason this is never decided in these types of thread comes down to one question.

How much are you willing to pay for the ability to sleep peacefully every night?

No two people have exactly the same answer and in fact the answers may be very, very different.
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TinyHouse
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by TinyHouse »

stocknoob4111 wrote: Fri Jan 27, 2023 7:58 am
randomguy wrote: Thu Jan 26, 2023 10:09 pm Again buckets aren't some horrible thing. They just don't do anything noticeable. If a 1929/1966/2000 sequence starts up tomorrow, if you have 3-10 years in cash with a special name or if you shove that money into your portfolio isn't going to make a noticeable difference. You are not able to avoid SORR either way.
I don't quite understand how it doesn't do anything noticeable. If you avoid withdrawing your portfolio during an initial bad sequence it should mathematically make a difference.

I backtested my own scheme with the 2000 cycle and using my method resulted in a 20% higher ending balance in 2023. So that is proof that in at least one bad cycle having additional cash was superior. And that just makes mathematical sense to me.

Assumption - I retire in Jan 2000. In Simulation 1 I had just a single portfolio with equities, bonds and cash as a single pool and did withdrawals from that pool, rebalanced annually. In Simulation 2 I had a separate stash of cash that I lived off 2000-2003 and deferred withdrawals from my portfolio until it had recovered in 2004.

In this strategy I don't "replenish" any buckets, it's simply a strategy that has some cash to do an initial deferral of withdrawals for as long as possible. My doing this I allow the portfolio a chance to recover and in the process also reduce the absolute number of withdrawals which predictably results in a higher ending balance.

Periodic Withdrawals inflation adjusted: $40,000/yr in 2000 dollars

Simulation 1 :
Starting Balance: $952,000 (Jan 2000)
Ending Balance: $942,672 (Jan 2023)

https://tinyurl.com/54hx8xyd

Simulation 2 :
Starting Balance: $802,000 (Jan 2000)
Cash Pool: $150,000
Ending Balance: $1,209,318 (Jan 2023)
(Withdrawals deferred to start 2004, 2000-2003 living off cash)

https://tinyurl.com/yzwcw4jp

This makes perfect sense as it avoids SORR which is what we want.
Except that your horizon is not three years, right? You are totally ignoring the returns during the years of accumulation leading up to your retirement, and the 30 years afterwards when you were trying to have your portfolio survive. That cash was a drag during vital returns years, there’s a huge opportunity cost. If we all just focused on Bear market periods, and if we knew when they were going to be, we would have big cash buckets at certain times, and 100% stock at other times.

Do the math again but this time over 30 or 40 years, not 3. I encourage you to actually read the ERN articles…
Triple digit golfer
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

KlangFool wrote: Fri Jan 27, 2023 8:27 am
Triple digit golfer wrote: Fri Jan 27, 2023 8:24 am
KlangFool wrote: Fri Jan 27, 2023 6:47 am
Triple digit golfer wrote: Fri Jan 27, 2023 3:11 am Any strategy that is designed to do different things based on recent market performance raises red flags for me.

Rather than saying you'll withdraw from your cash bucket in a bear market and creating arbitrary rules that require subjective decisions during emotionally stressful times, why not just do something like a 60/40 portfolio with the 40% being cash, always drawing from the heavier asset? That way you've got your 10 years of cash.

It's simple, objective, and most importantly, not any more detrimental than your arbitrary "bucket" approach and doesn't introduce the portfolio to more potential volatility after the market has gone down like the bucket approach does.
Do you rebalance by selling cash to buy the stock when the stock drops 50%?

Do you set a minimum limit on your cash that you would stop rebalancing?

If you don't maintain your AA all the time by rebalancing, you are changing your AA based on market fluctuations.

KlangFool
Yes.
No.
Triple digit golfer,

1) Do you keep your emergency fund inside your portfolio?

2) So, are you saying that you are willing to rebalance away your emergency fund if the stock market drops 90%?

3) Or, you never plan for the possibility that the stock market can drops 90%?

KlangFool
I don't have an emergency fund, per se. I have "safe" assets within the portfolio. Call it an emergency fund if you'd like. It's all my money, regardless of how I mentally account for it.

Suppose you have a $1 million portfolio at 60/40 and the stock market rises for a few years and now you're at $2 million. You've diligently rebalanced, so now you're $2 million at 60/40.

Now the stock market tanks. Your portfolio is back to $1 million. You're now at 60/40 because, again, you've diligently rebalanced.

You're right back where you were 3 years ago. That is, a $1 million, 60/40 portfolio.

Why would one spend down cash and end up at something like 80/20, when just a few years ago 60/40 was acceptable and desired on the same portfolio? Further, at this time, there may be higher unemployment and volatility in the market, perhaps further strengthening one's desire to hold cash, precisely at the time that many people end up with less.

It is totally illogical.
dknightd
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by dknightd »

dbr wrote: Fri Jan 27, 2023 7:12 am I would comment that taking money out of the portfolio to buy an SPIA or to set up a long term TIPS ladder is probably not usefully thought of as a bucket. In reality these instruments are no longer investments but income streams not different from other income streams such as Social Security, pensions, other annuities already in place, remittances from a trust, or whatever.

Certainly having rather than not having such income streams changes the ante regarding how the invested assets are handled, but buckets are about how actual invested assets are handled from there rather than income streams being a bucket in any usual meaning of the idea.
That is an interesting thought. I guess we all have a different idea of what a bucket is. When I retired I had a bucket of money that I planed to use to buy an SPIA. I drained that bucket and turned it into income. I bought one when I retired, I bought one last year, I'll likely buy another small one before I claim SS. I'm essentially changing a bucket of money into income.

I like the concept of a bucket that will never empty (i.e. income) and a bucket that might go up or down. I'll always have water to drink, and to clean myself. Maybe if I'm lucky I can take a long warm shower.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
dknightd
Posts: 3715
Joined: Wed Mar 07, 2018 10:57 am

Re: The “Bucket Strategy” is ineffective (ERN)

Post by dknightd »

Buckets are like envelopes. You can always move the leftovers. Or relable them.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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