Your portfolio, deconstructed
Hope you're having a wonderful Wednesday!
Elizabeth and I eat out pretty regularly.
99% of the time we'll grab a bite to eat somewhere casual and relaxed.
And every once in a while, we'll go to a nicer restaurant for a more refined dining experience.
Regardless of whether we're in a pub or a Michelin star restaurant, over the years I've seen several examples of a "deconstructed" meal.
You probably know what I'm talking about.
Deconstructed food involves separating the components of a dish and presenting them together.
I've seen deconstructed jambalaya, pot pie, tacos, desserts, and more over the years.
Ultimately, it's the same food just presented in a different way.
I often see the same thing in investment portfolios.
Deconstructed investment portfolios.
But they're more often referred to as a "bucket" strategy.
For example, rather than a diversified portfolio comprised of stocks, bonds, and cash, many advisors sing the praises of utilizing 3 buckets.
Here's how it works...
You would have a short-term or cash bucket that would typically contain 1-5 years of your planned expenses in cash.
The reasoning is this cash provides psychological comfort when the investment markets start bouncing around like they are these days.
It's OK, don't worry, says your bucket wielding advisor. That's what all this cash is for.
And when I refer to cash in this context, it would be held in a money market fund or high-yield savings account.
Your next bucket is typically bonds or fixed income of some flavor or another.
This might be referred to as your intermediate term bucket.
It's money that is invested with a longer outlook than your cash bucket, but it's clearly not exposed to the stock market.
Your bond bucket can help replenish your cash bucket as your spend money on your lifestyle and other expenses.
Most often this bucket is filled with bond funds but can also hold individual bonds as well.
And finally, you have a long term bucket which is filled with stocks. Either with stock funds, individual stocks, or both.
This is your "growth" bucket.
And since you have money carved out in cash and bonds in their respective buckets, the theory is that this will make it easier behaviorally to leave your stock bucket alone.
Even in the face of stock market volatility.
Conceptually, you'd use your stock bucket to refill your other 2 buckets over time.
This strategy is often designed to coincide with your planned spending and portfolio withdrawals throughout your retirement.
And it has many fans as well as its fair share of detractors.
While I don't want to discount any mental or behavioral benefits associated with ANY strategy, I believe it ultimately comes down to results.
There is no shortage of information online about this bucket strategy, both pro and con.
I'm not a fan of the bucket strategy personally and don't recommend it to clients.
I believe it unnecessarily complicates what can and should be a much more simple and straightforward element of your financial plan.
Also, keeping that much in cash will have a drag on your portfolio's results over time and is particularly painful in a higher inflation environment like we're all living through lately.
Also, if the stock market - and your stock bucket - is down, will you (or your advisor) have the backbone to take funds from your cash and/or bond buckets to buy more stocks and effectively "rebalance" your buckets?
I'll let you reach your own conclusions, but if you have questions or would like to discuss this further please let me know.
The bucket strategy is really just a more traditional, diversified portfolio that's been deconstructed into it's component parts.
But I believe the 3 bucket approach, while potentially offering additional psychological comfort, introduces other complexity and decisions that bring their own potential problems.
And let's not lose sight of the fact the goal here is to support you living your best life. For the rest of your life.
This is a case, in my opinion, of potentially majoring in the minors.
Here's another perspective on this strategy.
But what do you think?
Hit reply and let me know.
Links & Things
Thanks to each of you who took a moment to complete my quick survey last week. If you haven't yet shared your feedback, click here.
And if you're curious about the feedback I've received so far, here are some of the results.
Many women I'm introduced to are dealing with divorce. And while they're understandably focused on getting through one day at a time, it's also important to consider the longer-term impact of divorce on retirement. I address this in my latest blog post:
Finally, I enjoyed reading some retirement success stories shared by my friend and fellow newsletter publisher, Jeri. Thought you might be interested as well:
Thank you, as always, for reading.
And if you have any questions or an idea for a future newsletter, blog post, or YouTube video, I'd love your input.
Just hit reply - I read (and appreciate) every email you send.
Until next Wednesday,
Russ