Investors become anxious in month 118 of the economic expansion
As we enter month 118 of the current economic expansion, many investors are becoming anxious about the future of the investment markets. While many are experiencing FOMO (Fear of Missing Out) after having re-entered the investment market too late after the 2008-2009 debacle, they are also rightfully concerned that we are in the ninth inning of this current market.
The three arguments for a Bucket Plan:
The need to sleep at night
The challenge is to devise an investment strategy that will allow investors to sleep at night, take advantage of any market gains that still remain, but avoid selling at low prices when (not if) the stock markets inevitably tank. Most investors have short memories, but I clearly remember the angst and fear of 2008-2009, when stock markets declined by 45%.
Avoid selling low
There are two reasons that investors sell at the low point in the market cycle. Some have to, in order to fund their retirement income, or to make mandatory withdrawals in RIFs or IRAs, which are 5.2% or more per year of total value. Others get caught up in the headlines as Newspaper Business sections scream about the impending doom, or the talking heads on BNN and CNBC create even more panic with their useless predictions. Everyone forgets that none of these were able to predict either the market rises or the impending crash, or if they did, they were predicting them years too early and therefore missed out on the money making opportunities. Even Warren Buffet, whose Berkshire Hathaway has been sitting on $100 billion in cash for three years, can’t time the stock market.
Stay invested through market declines
Investors who panic and sell some or all of their investments seldom if ever get the timing right. The only way to prosper over the long term is to stay invested in order to avoid missing out on the market recoveries which invariably follow the crashes. And the best way to stay invested is to have enough cash and cash flow to not have to worry about the value of the underlying investments. As long as the cash flow remains stable, a retiree can relax and let time make up for the short term losses. The following graph shows how the US stock market recovered after the 2000-2002 and 2008 market sell offs.
The Bucket Plan Investing Strategy
Enter The Bucket Plan, an excellent book by Jason L. Smith which describes a simple and effective system to allay the fears of retiree investors, by ensuring that they will have enough cash for their needs, and avoiding the need to sell investments when markets tank. The idea here is to establish three buckets of investments that deal with three specific time periods.
The first is the Now Bucket, which contains near cash investments to cover anticipated and emergency expenses for the next 2-3 years. The second is the Soon Bucket, which covers income needs for the next ten years. The third is the Later or Future Bucket, which is to protect against inflation 10+ years out.
The Now Bucket can be invested in GICs, Money Market Funds, or High interest savings accounts, providing a guaranteed source of funds. These funds could cover planned expenses such as a new car, a new roof, or a grandchild’s education. They should also cover some emergency money for those unplanned expenditures which always occur. Depending on the individual, the Now Bucket could equal 5-20 % of the total investment portfolio.
The Soon Bucket covers the anticipated income needed over the next ten years. This could be used to cover mandatory withdrawals from retirement investments, as well as extra income which is needed or desired for quality of life. Investments could include high quality dividend companies or ETFs, preferred share ETFs, or Real Estate Investment Trust ETFs. For all three, even if their underlying value declines, they will still continue to pay their annual income at the predetermined rate. Again, depending on the individual, the Soon Bucket could equal 25-75% of the portfolio.
The Later Bucket is to provide for long term growth and inflation protection. The recently introduced Asset Allocation ETFs from Vanguard, I Shares and BMO would be great choices, particularly the 80 % equity, 20% bond ETFs. The Future Bucket could constitute 20-50% of a portfolio, again depending on the individual’s needs.
Here are two examples of model portfolios that use the Bucket Plan approach. The first is Pre RIF or IRA Pre mandatory withdrawal and the second is for RIF or IRA mandatory withdrawals. Of course each individual is different and the models would have to be adjusted accordingly. As with all investing decisions, investors are cautioned to do their own due diligence or seek the advice of a certified financial adviser.