The Bucket Strategy for Investing
 

Bucket strategies tend to be conservative, the first bucket holds cash and other safe instruments, while the other sections take on more risk. The aim is to assure that at least some of your assets will be able to cover expenses—no matter how markets perform over the short-term.

The strategy is the first bucket should hold cash, while the second and third buckets hold a mix of stocks and bonds. The goal is to not panic in downturns and sell all your stocks.

Three bucket strategy can be modified to include more buckets, for example a person planning on retiring in 30 years would setup six buckets. In the first bucket, you would put enough cash to cover 5 years of expenses. The second bucket, which covers years 5 through 10, would have a mix of safe stock and bond funds and so on. The further out you have the more risk you can put in each bucket.

Depending on age will play a major factor in how one allocates to each bucket. As you get older you will want to assume less risk. For retired individuals, you should be focused on managing risk—not on maximizing returns. You might need to live on your assets therefore your assets need to be protected from potential disasters.

Daniel Iuculano