• Brian Wiley

Bucket-Based Investing

Bucket-based investing is a cash flow planning strategy of compartmentalizing investments according to how and when the assets will be used in the future. Any assets needed within 3 years is best to be staged for distribution, thus being invested only for stability, while long term investments (needed 10 years or more from now) are invested for solely for growth. Any assets in between those times frames fit squarely in the mid-term bucket and are invested purely to replenish the first bucket as those assets are consumed for a goal, such as monthly income.

Here is how I like to use the bucket-based system.

Short-Term Bucket (0-3 Years)

The short-term bucket is any money needed immediately and as far out as 36 months from now. These assets might be bank accounts, portions of IRAs, ROTHs, 401(k)’s, etc. Simply put, these assets need to be worth the dollar that is expected the day the dollar is needed. The investment objective for this bucket is PROTECTION. Nothing else. This is where cash, money market, insured CD’s, and short term, high quality bonds represent an overall portfolio.

The amount of money in the short term bucket is simply determined by calculating how many dollars will be needed in the next 36 months to accomplish the goals defined in your plan, plus your emergency reserves.

Mid-Term Bucket (3-10 Years)

The mid-term bucket is used to refill the short term bucket as those assets are used. If your short term bucket is being consumed at the rate of $2,000 per month, then the mid-term bucket must be invested in a manner solely to produce enough income to replenish the short term bucket at least once per year. Thus, the sole investment objective of the middle bucket is to produce INCOME. Growth is a secondary perk, but never expected. This bucket may also contain various non-qualified accounts (such as joint accounts, trust accounts, business accounts) and qualified accounts (such as IRAs, ROTH, 401(k)’s, etc.). Value fluctuations are expected, but income levels are expected to remain constant. This is where you seek income producing investments such as rental properties, corporate bonds, long term government bonds, and value (dividend) stocks.

Calculating how much of your overall portfolio should be in this bucket is derived by calculating the annualized depletion rate of the short-term bucket and dividing that amount by the expected income rate (yield) you expect out of the mid-term bucket investments. For example, the $2,000 per month distribution from the first bucket is $24,000 per year. The middle bucket, with a dividend rate at 5% per year, would need to be funded with at least $480,000 of investment assets to cover this obligation. This could include all types of accounts (IRA’s, ROTHs, taxable, etc.). Further consideration should be given for taxation of the assets and income to be sure the middle bucket does not fail to refill the short-term bucket in a reliable and consistent manner.

Long-Term Bucket (10+ Years)

The long term bucket is used to provide for long term goals such as increasing demands for higher income over time, retirement income before a pension starts, or simply as an inheritance. No matter the goal, the funding date is at least 10 years from now, so invest it wisely and leave it alone. Time in the markets is the answer to market volatility and risk. Emotional investors add to the market volatility. This bucket takes advantage of those opportunities by allowing time to shake out volatile, headline-driven periods, while planned rebalancing helps ensure the bucket’s investments of buy low and sell high. This bucket has a single investment objective to produce GROWTH. Growth takes time and strategy to allow time to work for the bucket. This bucket has multiple account types like the first two buckets. Non-qualified accounts, qualified accounts, bare land, or anything that needs time to appreciate.

The long term bucket is the place for growth stocks. No bonds, no need for dividends. Just a solid, diversified mix of assets that are expected to be higher in 10 years, than they are today. This bucket needs to respond like the broad markets. Up in good times and down in bad times. The end result should be a steeper trend-line. The simple answer to the growth bucket is a plan; strategy and patience.

Let mid-term money stay invested to receive the income it was invested to get. And finally, let short-term money be the reliable source of cash that gets you through short- and mid-term increases of volatility.

Below is my video to support this blog post:

© 2019 VWDesigns.  All Rights Reserved.