The “Bucket Strategy” is ineffective (ERN)

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

Post by CloseEnough »

I would use a modified bucket strategy, when entering retirement. A bucket of 1-2 years of cash (actual cash, MM funds, CDs, not bond funds) and use it if the market turns down as you transition to retirement. If the market recovers before your cash bucket is gone, do nothing, stop using the cash unless needed for tax efficiency. If the market does not recover and you burn through your cash bucket, you are now in the SAA approach. Never refill the cash bucket that you had while entering retirement. Why? Just makes me feel better, eases the transition as it is a big enough transition without also having to draw from accounts that are all down in the first year. I know it does not make sense, and does not pass the analytical test.
abc132
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by abc132 »

I prefer barrels because they hold more cash.
Triple digit golfer
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

I haven't thought much about this because I'm still accumulating, but how is 15 years of stocks and 10 years of cash/bonds any different than holding a 60/40 portfolio, both mentally and in practice?

In the former, I assume that stocks would be sold only when they're "up" (whatever that means) and in the latter, you would simply sell whatever is heavier in the allocation as to keep it as close to possible to 60/40.

Let's say someone using the bucket strategy currently holds 15 and 10 years of stocks and cash/bonds, respectively, and needs to withdraw a year's worth of money for big expense. What do they do?
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Beensabu
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Beensabu »

retiringwhen wrote: Wed Jan 25, 2023 10:12 am I am kind of lost in the post as I don't understand just what he is calling a Strategic Asset Allocation (SAA) approach. Is that basically a fixed AA or is he employing one of the glidepaths or dynamic allocation schemes he has discussed? Lingo is getting in the way.
Yes, a "strategic" AA is a "fixed" or "static" AA. If you think "strategic/static" (not moving/changing), that helps it stick.

Vs. dynamic/tactical (has movement/change).
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
CloseEnough
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by CloseEnough »

Beensabu wrote: Wed Jan 25, 2023 1:46 pm
retiringwhen wrote: Wed Jan 25, 2023 10:12 am I am kind of lost in the post as I don't understand just what he is calling a Strategic Asset Allocation (SAA) approach. Is that basically a fixed AA or is he employing one of the glidepaths or dynamic allocation schemes he has discussed? Lingo is getting in the way.
Yes, a "strategic" AA is a "fixed" or "static" AA. If you think "strategic/static" (not moving/changing), that helps it stick.

Vs. dynamic/tactical (has movement/change).
Sounds like the opposite of strategy, more like strategery.
goblue100
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by goblue100 »

KlangFool wrote: Wed Jan 25, 2023 12:10 pm
Marseille07 wrote: Wed Jan 25, 2023 11:16 am
KlangFool wrote: Wed Jan 25, 2023 11:14 am Folks,

Cash is very useful for

A) Tax management.

B) ACA subsidy

C) "Sleep Well At Night"

D) If the portfolio is big enough, the inefficiency does not matter.

Whoever is wring the article would not be paying my bills when the time comes.

KlangFool
The thing is, having 2 years outside of 60/40 means you actually have 50/50 (or whatever the resulting number might be). It's not a bad strategy but no silver bullet either.
I am not an obsessive optimizer. Money is just a tool to live my life. It is not an end goal by itself.

You only need one word to be happy: "enough".

KlangFool
Yes, but if "enough" turns into "not enough" then we find "happy" turns quickly into "not happy", which is why these endless discussions ensue.:)
I myself think some cash is a valuable thing to have when taking money from the portfolio. Everyone is free to disagree with me, but I get to do what I want.
"Confusion has its cost" - Crosby, Stills and Nash
bikechuck
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by bikechuck »

frugalor wrote: Wed Jan 25, 2023 10:54 am I am not retired yet, but I feel the bucket strategy makes sense in retirement.

But I wonder if they treat treasuries as cash or as bonds? For me, they are cash because I can build a somewhat liquid flow with treasury ladder, and they won't lose nominal value like bond funds do.

If the safe buckets get depleted because of the 10+ year bear market, the other strategies would fare worse.
Sadly I am no longer sure that Treasuries are safe assets.
DSBH
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by DSBH »

Fictitious numerical example: assume that I retired yesterday with this portfolio:

(1) 25,000 shares of XYZ Balanced Index Fund x $40/sh = 1,000,000 and
(2) $120,000 in cash/money market, so

my starting AA is roughly 53.6/46.4 for a portfolio totaling $1,120,000.

I need to withdraw a 40,000/yr to support my living expenses in addition to SS and pension, so I sell 250 shares of XYZ Balanced Index Fund 4 times a year around the 1040-ES deadline and pay my estimated taxes - for a total of 1,000 shares per year. If I get more than $40,0000 from the sale I put the extra in the cash/MM bucket, if I get less than $40,000 from the sale I withdraw from the cash/MM bucket.

Is this a "bucket strategy", or a "static AA", or anything else ? :oops:
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CloseEnough
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by CloseEnough »

KlangFool wrote: Wed Jan 25, 2023 12:10 pm
You only need one word to be happy: "enough".

KlangFool
No, the word is "gratitude". There is research that backs this up.

And, it is true that "enough" can't buy you love.
petulant
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by petulant »

Ben Mathew wrote: Wed Jan 25, 2023 11:53 am
cheezit wrote: Wed Jan 25, 2023 10:30 am Here's some food for thought - how do we square this particular circle:

A) Bucket Strategies are Bad
B) Emergency Funds are Good

but

C) Emergency Funds are obviously a Bucket Strategy




We can fix this by falsifying A or falsifying B, or by engaging in some sophistry to falsify C. Eg. "emergency funds don't count as a bucket strategy because they are meant to ride out a different type of problem (eg. unemployment during the intended-to-be-accumulation stage) without drawing down stocks in a bear market, whereas cash buckets are meant to ride out the bear market itself without drawing down stocks".
I square it by rejecting (B). Emergency funds don't help. Savings are what matters. The asset allocation on total savings determines risk, not that fact that there's a special bucket labeled "emergency funds" holding bonds. Liquidity/accessibility of funds do matter, so for that purpose some funds may need to be held outside of a 401K. Roth IRA contributions can be accessed in case of emergency, so that can serve the purpose.
Isn't that just semantics? If the liquidity/accessibility characteristics of assets within a portfolio matter, and if the tradeoffs are such that liquidity/accessibility come at the cost of expected return, then the rational investor must engage in some exercise to ensure some X amount of such assets are in a liquid/accessible form and no more. This exercise would reasonably include a calculation of the probable risks that the investor is willing to insure against by protecting said liquidity/accessibility attribute for an asset of X size and foregoing the better return characteristics of other assets. What I have just described is an emergency fund, along with the process for determining the size of the emergency fund.
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Beensabu
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Beensabu »

CloseEnough wrote: Wed Jan 25, 2023 1:49 pm
Beensabu wrote: Wed Jan 25, 2023 1:46 pm
retiringwhen wrote: Wed Jan 25, 2023 10:12 am I am kind of lost in the post as I don't understand just what he is calling a Strategic Asset Allocation (SAA) approach. Is that basically a fixed AA or is he employing one of the glidepaths or dynamic allocation schemes he has discussed? Lingo is getting in the way.
Yes, a "strategic" AA is a "fixed" or "static" AA. If you think "strategic/static" (not moving/changing), that helps it stick.

Vs. dynamic/tactical (has movement/change).
Sounds like the opposite of strategy, more like strategery.
LOL. I had almost forgotten about that.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
dbr
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by dbr »

DSBH wrote: Wed Jan 25, 2023 1:54 pm Fictitious numerical example: assume that I retired yesterday with this portfolio:

(1) 25,000 shares of XYZ Balanced Index Fund x $40/sh = 1,000,000 and
(2) $120,000 in cash/money market, so

my starting AA is roughly 53.6/46.4 for a portfolio totaling $1,120,000.

I need to withdraw a 40,000/yr to support my living expenses in addition to SS and pension, so I sell 250 shares of XYZ Balanced Index Fund 4 times a year around the 1040-ES deadline and pay my estimated taxes - for a total of 1,000 shares per year. If I get more than $40,0000 from the sale I put the extra in the cash/MM bucket, if I get less than $40,000 from the sale I withdraw from the cash/MM bucket.

Is this a "bucket strategy", or a "static AA", or anything else ? :oops:
I think it is a "pipeline" strategy with a rule that tells you when to fill or draw the cash bucket and a rule for how much to draw from the stock bucket where the dollar amount varies with the share price. There are also some crossovers. Because you have a balanced fund you have a static proportion between stocks and bonds. You do not have a static proportion relative to cash. You do not have a transaction rule to rebalance cash to a fixed proportion. It would be natural that in between situations might be practiced by someone. That is why people have to say not what the categories are but also how they are managed.
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Kenkat
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Kenkat »

nisiprius wrote: Wed Jan 25, 2023 12:13 pm
Kenkat wrote: Wed Jan 25, 2023 11:11 am...In general, I think too many retirement strategies assume that a relatively fixed withdrawal amount, adjusted for inflation, will be needed throughout retirement, while the existence of social security makes that untrue. The planning assumption is invalid...
Too many retirement strategies assume that expenses in retirement will be more predictable than they are. It's all averages. Averages are great for insurance companies and public policy, not very useful for individuals.
I figure on more of a range anyway because, as you say, life happens and expenses aren’t perfectly predictable.

But using my own planning numbers, I will have a 4-5% withdraw rate before age 70 / social security and something along the lines of 1-2% after. That leads to my strategy of wanting to fund the before 70 “bucket” or whatever we should call it with great certainty while the after 70 bucket does not have that strict requirement. Maybe I just fall into the “you’ve got enough regardless” category, but this approach lets me sleep well amidst the “even 3% percent is not safe” posts.

Putting this a different way, while I don’t know (or plan on) reduced expenses later in retirement, I do know that I will have a significant increase in income that will occur post 70 when social security fully kicks in.
Last edited by Kenkat on Wed Jan 25, 2023 2:29 pm, edited 2 times in total.
KlangFool
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by KlangFool »

goblue100 wrote: Wed Jan 25, 2023 1:51 pm
KlangFool wrote: Wed Jan 25, 2023 12:10 pm
Marseille07 wrote: Wed Jan 25, 2023 11:16 am
KlangFool wrote: Wed Jan 25, 2023 11:14 am Folks,

Cash is very useful for

A) Tax management.

B) ACA subsidy

C) "Sleep Well At Night"

D) If the portfolio is big enough, the inefficiency does not matter.

Whoever is wring the article would not be paying my bills when the time comes.

KlangFool
The thing is, having 2 years outside of 60/40 means you actually have 50/50 (or whatever the resulting number might be). It's not a bad strategy but no silver bullet either.
I am not an obsessive optimizer. Money is just a tool to live my life. It is not an end goal by itself.

You only need one word to be happy: "enough".

KlangFool
Yes, but if "enough" turns into "not enough" then we find "happy" turns quickly into "not happy", which is why these endless discussions ensue.:)
I myself think some cash is a valuable thing to have when taking money from the portfolio. Everyone is free to disagree with me, but I get to do what I want.
goblue100,

That is not possible in my case at 30X without social security and 60K with social security. If it is not "enough" for me, it is no longer a financial problem.

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

Post by KlangFool »

CloseEnough wrote: Wed Jan 25, 2023 1:58 pm
KlangFool wrote: Wed Jan 25, 2023 12:10 pm
You only need one word to be happy: "enough".

KlangFool
No, the word is "gratitude". There is research that backs this up.

And, it is true that "enough" can't buy you love.
CloseEnough,

You can believe in your recent research. I choose to believe something much older than that. Aka, thousands of years old.

"And, it is true that "enough" can't buy you love."

Love is not something to be bought anyhow.

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

Post by Ben Mathew »

petulant wrote: Wed Jan 25, 2023 1:59 pm
Ben Mathew wrote: Wed Jan 25, 2023 11:53 am
cheezit wrote: Wed Jan 25, 2023 10:30 am Here's some food for thought - how do we square this particular circle:

A) Bucket Strategies are Bad
B) Emergency Funds are Good

but

C) Emergency Funds are obviously a Bucket Strategy




We can fix this by falsifying A or falsifying B, or by engaging in some sophistry to falsify C. Eg. "emergency funds don't count as a bucket strategy because they are meant to ride out a different type of problem (eg. unemployment during the intended-to-be-accumulation stage) without drawing down stocks in a bear market, whereas cash buckets are meant to ride out the bear market itself without drawing down stocks".
I square it by rejecting (B). Emergency funds don't help. Savings are what matters. The asset allocation on total savings determines risk, not that fact that there's a special bucket labeled "emergency funds" holding bonds. Liquidity/accessibility of funds do matter, so for that purpose some funds may need to be held outside of a 401K. Roth IRA contributions can be accessed in case of emergency, so that can serve the purpose.
Isn't that just semantics? If the liquidity/accessibility characteristics of assets within a portfolio matter, and if the tradeoffs are such that liquidity/accessibility come at the cost of expected return, then the rational investor must engage in some exercise to ensure some X amount of such assets are in a liquid/accessible form and no more. This exercise would reasonably include a calculation of the probable risks that the investor is willing to insure against by protecting said liquidity/accessibility attribute for an asset of X size and foregoing the better return characteristics of other assets. What I have just described is an emergency fund, along with the process for determining the size of the emergency fund.
It's not just semantics. The typical bucket strategy tilts towards a riskier asset allocation once the risk shows up and the investor starts consuming out of the bond only emergency fund. A liquidity/accessibility emergency plan does not need to do this. It can consume out of the accessible funds while maintaining the asset allocation of the overall portfolio (which includes the accessible funds) at the target asset allocation.
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smitcat
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by smitcat »

KlangFool wrote: Wed Jan 25, 2023 12:10 pm
Marseille07 wrote: Wed Jan 25, 2023 11:16 am
KlangFool wrote: Wed Jan 25, 2023 11:14 am Folks,

Cash is very useful for

A) Tax management.

B) ACA subsidy

C) "Sleep Well At Night"

D) If the portfolio is big enough, the inefficiency does not matter.

Whoever is wring the article would not be paying my bills when the time comes.

KlangFool
The thing is, having 2 years outside of 60/40 means you actually have 50/50 (or whatever the resulting number might be). It's not a bad strategy but no silver bullet either.
I am not an obsessive optimizer. Money is just a tool to live my life. It is not an end goal by itself.

You only need one word to be happy: "enough".

KlangFool
"D) If the portfolio is big enough, the inefficiency does not matter."
This is absolutely true - the inefficiencies of a cash buffer are not that important to larger portfolios. There are many articles on this including Kitces and the ERN series.

"I am not an obsessive optimizer."
That is not reflected in your more complicated retirement planning.

"You only need one word to be happy: "enough"."
This sounds wonderful to some folks, but it is not at all reflective of your actions.
"Do what I say, not what I do"
CloseEnough
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by CloseEnough »

KlangFool wrote: Wed Jan 25, 2023 2:21 pm
"And, it is true that "enough" can't buy you love."

Love is not something to be bought anyhow.

KlangFool
KF

Yes, we are in agreement. Money can't buy you love, determined for all time, not thousands of years ago, actually in 1964 by the Beatles.
Leesbro63
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Leesbro63 »

It’s silly mental accounting. In the end, there’s you, your equity and your fixed income. Your asset allocation is what it is; just because you mentally ignore part of it doesn’t mean it’s not a thing.
KlangFool
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by KlangFool »

smitcat wrote: Wed Jan 25, 2023 2:28 pm
KlangFool wrote: Wed Jan 25, 2023 12:10 pm
Marseille07 wrote: Wed Jan 25, 2023 11:16 am
KlangFool wrote: Wed Jan 25, 2023 11:14 am Folks,

Cash is very useful for

A) Tax management.

B) ACA subsidy

C) "Sleep Well At Night"

D) If the portfolio is big enough, the inefficiency does not matter.

Whoever is wring the article would not be paying my bills when the time comes.

KlangFool
The thing is, having 2 years outside of 60/40 means you actually have 50/50 (or whatever the resulting number might be). It's not a bad strategy but no silver bullet either.
I am not an obsessive optimizer. Money is just a tool to live my life. It is not an end goal by itself.

You only need one word to be happy: "enough".

KlangFool
"D) If the portfolio is big enough, the inefficiency does not matter."
This is absolutely true - the inefficiencies of a cash buffer are not that important to larger portfolios. There are many articles on this including Kitces and the ERN series.

"I am not an obsessive optimizer."
That is not reflected in your more complicated retirement planning.

"You only need one word to be happy: "enough"."
This sounds wonderful to some folks, but it is not at all reflective of your actions.
"Do what I say, not what I do"
smitcat,

To each its own.

I can describe my retirement planning in one page. You believe in putting your numbers through retirement planning tools. You believe my method is complicated. I believe anything require more than one page to explain as complicated.

To each its own.

KlangFool
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Marseille07
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Marseille07 »

Ben Mathew wrote: Wed Jan 25, 2023 2:23 pm It's not just semantics. The typical bucket strategy tilts towards a riskier asset allocation once the risk shows up and the investor starts consuming out of the bond only emergency fund. A liquidity/accessibility emergency plan does not need to do this. It can consume out of the accessible funds while maintaining the asset allocation of the overall portfolio (which includes the accessible funds) at the target asset allocation.
That's like saying buying a new car or replacing your roof tilts your portfolio.

While I don't use the bucket strategy, spending down cash instead of selling equities has some merit.
randomguy
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by randomguy »

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?
The difference between taking your money and putting 2 years in cash and investing the rest versus just leaving that money in say 60/40 allocation are going to be almost zero. The slight differences in AA overtime just aren't that big. You would need to put in your exact rebalancing rules to figure out if it is a win or a loss. But you are talking about the difference between like 55/45 and 60/40. You are going to be talking very small differences.
Triple digit golfer
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

Marseille07 wrote: Wed Jan 25, 2023 2:46 pm
Ben Mathew wrote: Wed Jan 25, 2023 2:23 pm It's not just semantics. The typical bucket strategy tilts towards a riskier asset allocation once the risk shows up and the investor starts consuming out of the bond only emergency fund. A liquidity/accessibility emergency plan does not need to do this. It can consume out of the accessible funds while maintaining the asset allocation of the overall portfolio (which includes the accessible funds) at the target asset allocation.
That's like saying buying a new car or replacing your roof tilts your portfolio.

While I don't use the bucket strategy, spending down cash instead of selling equities has some merit.
Not really. If desired AA is X, then why would desired AA be different just because the market is down?

If I want to hold 60/40 and then spend cash so it's now 80/20, what merit does that have? All I've done is shifted toward a more risky asset allocation over time. Why would one wish to do that?

It's even more pronounced in a down market and people spend all their cash. If I start at 60/40, market drops, stays down and now I'm 50/50, but I get spooked and spend cash over the next several years to the point that I'm now at 80/20, that makes no sense. Why go riskier when the risk has showed up? Just to avoid spending stocks? Why? Isn't that what they're there for, to spend down one day? It shouldn't matter if the market is down from some arbitrary point in time. If one wishes to hold a 60/40 AA, then one should hold a 60/40 AA.

Buying a new car or replacing a roof is an expense, no different to me than buying groceries or paying the gas bill. I assume that most people don't count cars or roofs in their asset allocation.
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Ben Mathew
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Ben Mathew »

Marseille07 wrote: Wed Jan 25, 2023 2:46 pm
Ben Mathew wrote: Wed Jan 25, 2023 2:23 pm It's not just semantics. The typical bucket strategy tilts towards a riskier asset allocation once the risk shows up and the investor starts consuming out of the bond only emergency fund. A liquidity/accessibility emergency plan does not need to do this. It can consume out of the accessible funds while maintaining the asset allocation of the overall portfolio (which includes the accessible funds) at the target asset allocation.
That's like saying buying a new car or replacing your roof tilts your portfolio.
It's the difference between risk and planned expenses.

- You probably won't need a new car right after you replace your old car.
- You probably won't need a new roof right after you replace your old roof.

This is a liability matched portfolio type scenario. Using bonds set aside for these to meet these liabilities would not change the overall asset allocation on the risk portfolio.

Risk is different. You could get into another car crash right after you got into a car crash. (In fact, insurance companies think you're more likely to and they raise your premiums.) The risk doesn't go away. You need to keep your insurance. So asset allocation should not become riskier when risk shows up.
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Marseille07
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Marseille07 »

Ben Mathew wrote: Wed Jan 25, 2023 3:04 pm It's the difference between risk and planned expenses.

- You probably won't need a new car right after you replace your old car.
- You probably won't need a new roof right after you replace your old roof.

This is a liability matched portfolio type scenario. Using bonds set aside for these to meet these liabilities would not change the overall asset allocation on the risk portfolio.

Risk is different. You could get into another car crash right after you got into a car crash. (In fact, insurance companies think you're more likely to and they raise your premiums.) The risk doesn't go away. You need to keep your insurance. So asset allocation should not become riskier when risk shows up.
I mentioned car & roof as examples that lower your cash holding. Aren't you calling low cash bucket (less safe assets) "tilting your portfolio riskier"? It doesn't matter what the cause is actually, could even be just paying your regular living expenses.
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Ben Mathew
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Ben Mathew »

Marseille07 wrote: Wed Jan 25, 2023 3:10 pm
Ben Mathew wrote: Wed Jan 25, 2023 3:04 pm It's the difference between risk and planned expenses.

- You probably won't need a new car right after you replace your old car.
- You probably won't need a new roof right after you replace your old roof.

This is a liability matched portfolio type scenario. Using bonds set aside for these to meet these liabilities would not change the overall asset allocation on the risk portfolio.

Risk is different. You could get into another car crash right after you got into a car crash. (In fact, insurance companies think you're more likely to and they raise your premiums.) The risk doesn't go away. You need to keep your insurance. So asset allocation should not become riskier when risk shows up.
I mentioned car & roof as examples that lower your cash holding. Aren't you calling low cash bucket (less safe assets) "tilting your portfolio riskier"? It doesn't matter what the cause is actually, could just be paying your regular living expenses.
The cash used to pay for the car and roof have cancelled out your car and roof liabilities. So the overall portfolio factoring in your known future liabilities is not riskier after you paid for the car and roof with cash.
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randomguy
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by randomguy »

Triple digit golfer wrote: Wed Jan 25, 2023 1:37 pm I haven't thought much about this because I'm still accumulating, but how is 15 years of stocks and 10 years of cash/bonds any different than holding a 60/40 portfolio, both mentally and in practice?

In the former, I assume that stocks would be sold only when they're "up" (whatever that means) and in the latter, you would simply sell whatever is heavier in the allocation as to keep it as close to possible to 60/40.

Let's say someone using the bucket strategy currently holds 15 and 10 years of stocks and cash/bonds, respectively, and needs to withdraw a year's worth of money for big expense. What do they do?
The difference is in rebalancing. The 60/40 person rebalances every year. The bucket person lets the AA float a lot more and only rebalances depending on the rules. With short market fluctuations, things don't matter much. You don't buy stocks at low prices but you also don't try and catch a falling knife. The difference is in long declines. Imagine you retire in 2000. Stocks don't hit new highs for a decade. Holding 100/0 in 2011 might be uncomfortable as the markets plunge.

It is seductive to think well if I don't sell stocks when they are down, I have avoided the risk of owning stocks. But you have only avoided the volatility. You didn't avoid the poor returns (0% versus the expected 7%). It is the combo of volatility and poor returns that doom retirement spending.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by billthecat »

For this discussion, are I bonds "cash" or "bonds"?

I figure that if I'm retired and the market is down, I'd spend from cash (and dividends). If the cash runs out and the market is down, then I'd spend either total bond or I bonds depending on whether total bond was up or down. (If down as in 2022, I'd spend from I bonds.)

It's true that you could get to the point where all your cash is gone, all your I bonds are gone, all your total bond is gone, and you're just left with total market, and it's still down. And, worse, down further than the first year(s) when it was down less, when you might have sold it at a smaller reduction than you're faced with now. But what's the alternative? Spend first from stock even though it's down?
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by TinyHouse »

HenryG wrote: Wed Jan 25, 2023 1:01 pm
TinyHouse wrote: Wed Jan 25, 2023 12:02 pm
Marseille07 wrote: Wed Jan 25, 2023 10:50 am
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/
We all use buckets.

I think it's stupid to say "60/40" is not a bucket but "equities & 10 years expenses in safe assets" is.
Right, my whole portfolio is my emergency fund, my spending account, slush fund, etc.

It’s all one bucket, we all just have different allocations and types of accounts (roth, etc).
So you have different account/allocation buckets within one bucket. Got it.
Right, I have one bucket/retirement portfolio and it’s mostly vtsax and I don’t rebalance, just keep investing until I’m done accumulating. I spend all my cash each month. It’s simple and effective, requires no planning
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Marseille07 »

Ben Mathew wrote: Wed Jan 25, 2023 3:24 pm The cash used to pay for the car and roof have cancelled out your car and roof liabilities. So the overall portfolio factoring in your known future liabilities is not riskier after you paid for the car and roof with cash.
Then why did you make a blanket claim that spending down the cash bucket tilts their portfolio riskier? Maybe they were buying a car and replacing the roof.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by dbr »

billthecat wrote: Wed Jan 25, 2023 3:32 pm For this discussion, are I bonds "cash" or "bonds"?

I figure that if I'm retired and the market is down, I'd spend from cash (and dividends). If the cash runs out and the market is down, then I'd spend either total bond or I bonds depending on whether total bond was up or down. (If down as in 2022, I'd spend from I bonds.)

It's true that you could get to the point where all your cash is gone, all your I bonds are gone, all your total bond is gone, and you're just left with total market, and it's still down. And, worse, down further than the first year(s) when it was down less, when you might have sold it at a smaller reduction than you're faced with now. But what's the alternative? Spend first from stock even though it's down?
You can decide what are the investments for particular buckets as long as there is a rule for what transactions to make.

A standard alternative to buckets is to maintain a fixed ratio among all the assets you distinguish, whatever that is, and you keep that on target at all times by some convenient combination of "spending from" some asset and selling one asset to buy another one. A person following a fixed asset allocation plan does not exactly "spend from" anything specifically rather than "from the portfolio" together with whatever else is needed to stay at target allocation.

It is a basic tenet of buckets that certain assets are specifically identified as the source of spending and then somewhere in the background are some rules how to move money from one bucket (asset) to others at various times but without trying to keep an allocation at a target proportion.

As far as I can tell the only difference in practice is how does the asset allocation vary or not vary and when. Also, I suspect that excepting extreme circumstances the asset allocations in both cases don't differ very much and therefore the outcome does not differ very much. After all, selling bonds to take withdrawals when stocks are down and selling bonds to take withdrawals and in addition selling bonds and buying stocks to rebalance may not get very far apart from each other, especially when the slosh reverses when stocks are up again.

It really is necessary to run the rule through a probabilistic model to tabulate where the two ranges of outcomes can be expected to fall, including the main body of "normal" variation and at the extremes.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Ben Mathew »

Marseille07 wrote: Wed Jan 25, 2023 3:52 pm
Ben Mathew wrote: Wed Jan 25, 2023 3:24 pm The cash used to pay for the car and roof have cancelled out your car and roof liabilities. So the overall portfolio factoring in your known future liabilities is not riskier after you paid for the car and roof with cash.
Then why did you make a blanket claim that spending down the cash bucket tilts their portfolio riskier? Maybe they were buying a car and replacing the roof.
That is not what people normally mean by a "bucket strategy."
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Marseille07 »

Ben Mathew wrote: Wed Jan 25, 2023 3:56 pm That is not what people normally mean by a "bucket strategy."
As I said, the idea is the same. You stop selling equities and spend down the cash bucket during a downturn. You argued that that makes your portfolio riskier. I don't agree with your take, that's all.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by secondopinion »

Marseille07 wrote: Wed Jan 25, 2023 3:58 pm
Ben Mathew wrote: Wed Jan 25, 2023 3:56 pm That is not what people normally mean by a "bucket strategy."
As I said, the idea is the same. You stop selling equities and spend down the cash bucket during a downturn. You argued that that makes your portfolio riskier. I don't agree with your take, that's all.
If one looks at what happens to the volatility of stocks during a downturn (look at the VIX index on downturns), it technically does increase the composite risk even to rebalance -- let alone spend out the cash. One might argue the expected returns has increased, but that does not change that the risk has also increased.

One might not agree with the market assessment; but it is what it is, whether one likes it or not.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Northern Flicker »

A bucket strategy can be just a way to arrive at an asset allocation. It does not have to be implemented as 1 fund per bucket. One can calculate the duration in aggregate of the fixed income buckets, and collapse them down to a minimal set of buckets/funds.

In other words, bucketing can be an asset allocation strategy, a spending/drawdown strategy, or both.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Northern Flicker »

Ben Mathew wrote: Wed Jan 25, 2023 2:23 pm It's not just semantics. The typical bucket strategy tilts towards a riskier asset allocation once the risk shows up and the investor starts consuming out of the bond only emergency fund. A liquidity/accessibility emergency plan does not need to do this. It can consume out of the accessible funds while maintaining the asset allocation of the overall portfolio (which includes the accessible funds) at the target asset allocation.
Both of those are bucketing strategies. The short-term buckets do not need to be included in the portfolio risk assessment. The portfolio risk is established as a appropriate, and when short/term buckets are replenished, risk is lessened, but gradually restored as withdrawals are made until the buckets are replenished.

You can set the risk of the longer term bucket to whatever you want.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by White Coat Investor »

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.
Good thing everybody doesn't use it though or the article wouldn't be there for you to read! "Should be" assumes people should work for free and I don't know very many of them. That "clutter" is why you were able to read the article without paying a subscription fee.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

Marseille07 wrote: Wed Jan 25, 2023 3:58 pm
Ben Mathew wrote: Wed Jan 25, 2023 3:56 pm That is not what people normally mean by a "bucket strategy."
As I said, the idea is the same. You stop selling equities and spend down the cash bucket during a downturn. You argued that that makes your portfolio riskier. I don't agree with your take, that's all.
It isn't an opinion. Of course reducing the "safe" asset in a portfolio makes it more risky, unless of course one was holding very few stocks to begin with, something we're not discussing here. In a 60/40 or any widely accepted asset allocation (say 30/70 to 90/10), reducing the cash portion makes the portfolio more risky.

On another note, there is no "during" a downturn unless you're looking backward. One isn't spending down cash knowing if the downturn is over or not, only that a downturn has occurred.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by secondopinion »

White Coat Investor wrote: Wed Jan 25, 2023 4:32 pm
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.
Good thing everybody doesn't use it though or the article wouldn't be there for you to read! "Should be" assumes people should work for free and I don't know very many of them. That "clutter" is why you were able to read the article without paying a subscription fee.
Right. People have to make a living. I try to do my part by only blocking bad advertisements; there is nothing wrong with real estate agents, life insurance, and pet food.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Marseille07 »

secondopinion wrote: Wed Jan 25, 2023 4:08 pm If one looks at what happens to the volatility of stocks during a downturn (look at the VIX index on downturns), it technically does increase the composite risk even to rebalance -- let alone spend out the cash. One might argue the expected returns has increased, but that does not change that the risk has also increased.

One might not agree with the market assessment; but it is what it is, whether one likes it or not.
But you're just holding equities through the downturn...why does it matter that the composite risk has increased, even if it has?

Are you saying you'd rather sell equities than spend down cash? I don't quite understand the action you're suggesting.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by nisiprius »

billthecat wrote: Wed Jan 25, 2023 3:32 pm For this discussion, are I bonds "cash" or "bonds"?
To me the answer seems crystal clear, although I guess it isn't because it's been challenged.

A "bond" means something with a legal contract, often to pay specified numbers of dollars on specific days. Possibly with provisions for calling, conversion to stock, or in the case of I bonds and TIPS, specified numbers after inflation adjustment. In the broad sense I bonds are "bonds."

However, because they are not marketable, they are utterly different from most bonds--including TIPS and nominal Treasury bonds, corporate bonds, etc. They can't be sold, they can't be used as loan collateral, the only thing you can do with them is redeem them with the Treasury. And according to the contract, their value is a perfectly smooth curve which never goes down.

They have no interest rate risk. Their value does not decline when interest rates rise.

Series I savings bonds are a lot like "cash," including Treasury bills, money market funds, and bank accounts. The only difference is that their value is inflation indexed. And they are not the least bit like any marketable bonds I know of.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by marcopolo »

KlangFool wrote: Wed Jan 25, 2023 2:41 pm
smitcat wrote: Wed Jan 25, 2023 2:28 pm
KlangFool wrote: Wed Jan 25, 2023 12:10 pm
Marseille07 wrote: Wed Jan 25, 2023 11:16 am
KlangFool wrote: Wed Jan 25, 2023 11:14 am Folks,

Cash is very useful for

A) Tax management.

B) ACA subsidy

C) "Sleep Well At Night"

D) If the portfolio is big enough, the inefficiency does not matter.

Whoever is wring the article would not be paying my bills when the time comes.

KlangFool
The thing is, having 2 years outside of 60/40 means you actually have 50/50 (or whatever the resulting number might be). It's not a bad strategy but no silver bullet either.
I am not an obsessive optimizer. Money is just a tool to live my life. It is not an end goal by itself.

You only need one word to be happy: "enough".

KlangFool
"D) If the portfolio is big enough, the inefficiency does not matter."
This is absolutely true - the inefficiencies of a cash buffer are not that important to larger portfolios. There are many articles on this including Kitces and the ERN series.

"I am not an obsessive optimizer."
That is not reflected in your more complicated retirement planning.

"You only need one word to be happy: "enough"."
This sounds wonderful to some folks, but it is not at all reflective of your actions.
"Do what I say, not what I do"
smitcat,

To each its own.

I can describe my retirement planning in one page. You believe in putting your numbers through retirement planning tools. You believe my method is complicated. I believe anything require more than one page to explain as complicated.

To each its own.

KlangFool
You have tried this a couple of times now, and keep claiming your approach is simple. Honestly, I still don't know that you know what your withdrawals strategy is with regard to your buckets, or cash buffer. I don't think you do either. That is because you are making it complicated. Does it need to be that complicated, only you can decide.

Here is our withdrawal plan:

1) Maintain asset allocation target of 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 5% trigger band to rebalance, if (2) and (3) don't do the job. (Happens very rarely, last time was in March 2020)

That's it.
You have had multiple threads spanning hundreds of posts. Can you define your withdrawal strategy in simple to follow terms?



From a Feb 2021 Thread:
KlangFool wrote: Wed Feb 10, 2021 3:39 pm
marcopolo wrote: Wed Feb 10, 2021 2:58 pm IMHO you are over complicating things.

You actually have 28x.
Keep it in a 60/40 AA portfolio (or your preferred allocation). Any cash is part of the Fixed Income allocation

When it is time to withdraw, do so in a way to maintain desired allocation. Do additional rebalancing if necessary to maintain desired AA.

This will effectively withdraw from fixed income (your cash bucket) when equities are down, and from equities when they are up.

No need to worry about when to refill bucket.
marcopolo,

You might be right. I need to think this through.


KlangFool


From a recent thread:
KlangFool wrote: Sun Jan 15, 2023 9:01 am Folks,

Thanks for the feedback and sanity.

Special thanks for the posts from MattB, SnowBog, and marcopolo. I need more works on the refilling the cash buffer algorithm. I need a better definition as to when to refill the buffer (once per year?) and where to source the money (Taxable or Roth). And, what to do in a bear or bull market. I have to spend more time doing the analysis before I can post something for the forum to review.

At the meantime, due to my HCE limitation, I would be increasing my cash buffer and stock investment during 2023.

Thanks again for all the sanity checks.

KlangFool
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by billthecat »

White Coat Investor wrote: Wed Jan 25, 2023 4:32 pm
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.
Good thing everybody doesn't use it though or the article wouldn't be there for you to read! "Should be" assumes people should work for free and I don't know very many of them. That "clutter" is why you were able to read the article without paying a subscription fee.
secondopinion wrote: Wed Jan 25, 2023 4:44 pm
White Coat Investor wrote: Wed Jan 25, 2023 4:32 pm
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.
Good thing everybody doesn't use it though or the article wouldn't be there for you to read! "Should be" assumes people should work for free and I don't know very many of them. That "clutter" is why you were able to read the article without paying a subscription fee.
Right. People have to make a living. I try to do my part by only blocking bad advertisements; there is nothing wrong with real estate agents, life insurance, and pet food.
Reader mode does not block ads. In fact, I specifically review all the ads before switching to reader view.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by smitcat »

KlangFool wrote: Wed Jan 25, 2023 2:41 pm
smitcat wrote: Wed Jan 25, 2023 2:28 pm
KlangFool wrote: Wed Jan 25, 2023 12:10 pm
Marseille07 wrote: Wed Jan 25, 2023 11:16 am
KlangFool wrote: Wed Jan 25, 2023 11:14 am Folks,

Cash is very useful for

A) Tax management.

B) ACA subsidy

C) "Sleep Well At Night"

D) If the portfolio is big enough, the inefficiency does not matter.

Whoever is wring the article would not be paying my bills when the time comes.

KlangFool
The thing is, having 2 years outside of 60/40 means you actually have 50/50 (or whatever the resulting number might be). It's not a bad strategy but no silver bullet either.
I am not an obsessive optimizer. Money is just a tool to live my life. It is not an end goal by itself.

You only need one word to be happy: "enough".

KlangFool
"D) If the portfolio is big enough, the inefficiency does not matter."
This is absolutely true - the inefficiencies of a cash buffer are not that important to larger portfolios. There are many articles on this including Kitces and the ERN series.

"I am not an obsessive optimizer."
That is not reflected in your more complicated retirement planning.

"You only need one word to be happy: "enough"."
This sounds wonderful to some folks, but it is not at all reflective of your actions.
"Do what I say, not what I do"
smitcat,

To each its own.

I can describe my retirement planning in one page. You believe in putting your numbers through retirement planning tools. You believe my method is complicated. I believe anything require more than one page to explain as complicated.

To each its own.

KlangFool
"You believe in putting your numbers through retirement planning tools."
- I believe that knowing the real numbers for SS, taxes, ACA and other current laws are mandatory for any retirement plan

"You only need one word to be happy: "enough"
- I believe you say this to others but do not practice what you say

"I believe anything require more than one page to explain as complicated"
- I believe most retirement plans can easily live on one page, running modeling software is not a plan

"You believe my method is complicated."
- I believe your plan includes wrong data, inaccurate theories, and unnecessarily complicated due partly to the above reasons
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by secondopinion »

Marseille07 wrote: Wed Jan 25, 2023 4:45 pm
secondopinion wrote: Wed Jan 25, 2023 4:08 pm If one looks at what happens to the volatility of stocks during a downturn (look at the VIX index on downturns), it technically does increase the composite risk even to rebalance -- let alone spend out the cash. One might argue the expected returns has increased, but that does not change that the risk has also increased.

One might not agree with the market assessment; but it is what it is, whether one likes it or not.
But you're just holding equities through the downturn...why does it matter that the composite risk has increased, even if it has?

Are you saying you'd rather sell equities than spend down cash? I don't quite understand the action you're suggesting.
If one has a set risk budget, then a sudden downturn is likely to restrict the stocks down from than the planned allocation; that might mean not fully rebalancing or rarely even selling stocks (minding that the downturn has already reduced the present allocation of stocks, so this is often rare). This is entirely against what is discussed here, but there are analytical reasons why even the professionals sell during dips -- and it is not panic.

Implied volatility is one of the only metrics I use in my portfolio design. I seek high volatility environments, so I am among the bold buyers in such cases. Many here unknowingly step into this group; hence, one will see attempts to correct the problem -- but some attempts are actually worsening it.

So, one can do what they want; but realize that risk is not predictable nor constant.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by secondopinion »

billthecat wrote: Wed Jan 25, 2023 5:06 pm
White Coat Investor wrote: Wed Jan 25, 2023 4:32 pm
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.
Good thing everybody doesn't use it though or the article wouldn't be there for you to read! "Should be" assumes people should work for free and I don't know very many of them. That "clutter" is why you were able to read the article without paying a subscription fee.
secondopinion wrote: Wed Jan 25, 2023 4:44 pm
White Coat Investor wrote: Wed Jan 25, 2023 4:32 pm
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.
Good thing everybody doesn't use it though or the article wouldn't be there for you to read! "Should be" assumes people should work for free and I don't know very many of them. That "clutter" is why you were able to read the article without paying a subscription fee.
Right. People have to make a living. I try to do my part by only blocking bad advertisements; there is nothing wrong with real estate agents, life insurance, and pet food.
Reader mode does not block ads. In fact, I specifically review all the ads before switching to reader view.
I am not worried about your browsing. It is more of a comical statement of some of the ads I can get (and I do not have a problem with).
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by DSBH »

dbr wrote: Wed Jan 25, 2023 2:08 pm
DSBH wrote: Wed Jan 25, 2023 1:54 pm Fictitious numerical example: assume that I retired yesterday with this portfolio:

(1) 25,000 shares of XYZ Balanced Index Fund x $40/sh = 1,000,000 and
(2) $120,000 in cash/money market, so

my starting AA is roughly 53.6/46.4 for a portfolio totaling $1,120,000.

I need to withdraw a 40,000/yr to support my living expenses in addition to SS and pension, so I sell 250 shares of XYZ Balanced Index Fund 4 times a year around the 1040-ES deadline and pay my estimated taxes - for a total of 1,000 shares per year. If I get more than $40,0000 from the sale I put the extra in the cash/MM bucket, if I get less than $40,000 from the sale I withdraw from the cash/MM bucket.

Is this a "bucket strategy", or a "static AA", or anything else ? :oops:
I think it is a "pipeline" strategy with a rule that tells you when to fill or draw the cash bucket and a rule for how much to draw from the stock bucket where the dollar amount varies with the share price …
That would be a fair way to look at it. I am thinking of it as a - fixed 4% in number of shares - withdrawal strategy from a 60/40 portfolio into a living expense checking account with a balance large enough to “smooth out” variations in share prices, in either direction.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by HeavyChevy »

My "bucket strategy" involves having stable assets, currently 17 months expenses in MM funds, to cover expenses and get me to the point of taking SS at age 64.5ish. After that my AA will no longer contain cash, and will be fixed.

(not having to touch stocks when they are down significantly for any number of months (say 6, 12, 24 depending on resources) is better than having to sell then, regardless of how long a bear market lasts after the cash bucket is depleted)
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Parkinglotracer »

Even squirrels bury acorns for the winter.
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Re: The “Bucket Strategy” is ineffective (ERN)

Post by Triple digit golfer »

marcopolo wrote: Wed Jan 25, 2023 5:01 pmHere is our withdrawal plan:

1) Maintain asset allocation target of 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 5% trigger band to rebalance, if (2) and (3) don't do the job. (Happens very rarely, last time was in March 2020
Perfect, and exactly my plan when we retire. Simply put, maintain the asset allocation.

In accumulation, I do the same. This means contributing to whichever asset is lagging. If a large expense comes up that I cannot "cash flow," such as a car or a new roof, I would withdraw from whichever asset is heavy. If that happens to be equities, so be it. I wish to maintain 80/20 and there's no reason I wouldn't wish to maintain 80/20 just because I recently bought a car or a roof.
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