Use the Bucket Strategy to Promote Successful Investing Habits

The American College of Financial Services
May 25, 2017

What Is The Bucket Strategy?

The bucket strategy is a way to think about asset allocation by conceptualizing a portfolio as a series of “buckets,” each of which contain assets of varying risk levels to match a series of time horizons. The bucket strategy offers investors a model for thinking about investments that has been shown to be beneficial.
How Bucketing Keeps Investors On Course

Guiding clients toward behaviors that enhance and protect their retirement income may be one of the most valuable contributions an advisor can make to an investor’s financial well-being. Professor David Littell, Director of the Retirement Income Program at The American College of Financial Services says a bucket strategy is effective for investors because it is easily understood. “Clients can better envision how their assets are used to meet their income needs, and the better the client understands the plan, the more likely they will buy into it,” Littell explains.

A bucket strategy is particularly valuable for investors who have difficulty tolerating volatile markets and feel the urge to liquidate investments during market declines. Decisions about cashing out of an investment should be made in the framework of an investor’s overall goals, not in response to a dip in the market.

If investors become anxious about market volatility, it may be time to review their risk tolerance ratings. But advisors also find that using the bucket strategy blunts the temptation for clients to respond emotionally to a downturn and keeps them aligned with their goals.

The Bucket Strategy In Action

To enact a bucket strategy, an advisor divides a client’s investment portfolio into three separate buckets. This approach involves linking investments to time horizons and risks and placing them in appropriate buckets. It’s common to use three buckets as follows:

  • Bucket 1: contains funds for expenses for the first 10 years of retirement and is invested very conservatively. This short-term bucket invests in cash, individual bonds, bond-comprised Unit Investment Trusts with clear maturity dates, and fixed annuities with fixed maturity time horizons. These investments minimize volatility.
  • Bucket 2: holds investments needed for years 10 through 20. Because it is earmarked for spending in a decade, it can be invested more moderately.
  • Bucket 3: carries investments not needed for 20 or more years and since there is time to ride out market fluctuations, it can be invested in a growth portfolio with higher risk and more equities.

Bear in mind that any number of buckets can be employed for this approach, though three is the most common number used. The length of time and risk allocations contained in each bucket can also be adjusted according to individual preferences.

Improve Investor Confidence With The Bucket Strategy

Though this approach has similar results to systematic withdrawals, it can be easier for investors to grasp. The notion of segmenting investments into separate buckets with risk linked to time horizons, is for whatever reason, often more simple to understand than systematic withdrawals.

When investors know Bucket 1 is available for nearer term expenses, it helps quell their anguish over downturns in Bucket 3. When investors understand they won’t need to access the funds in Bucket 3 for decades, it discourages them them from liquidating their investments.

Financial planning professionals learn to use the bucket strategy when they earn the Retirement Income Certified Planner® (RICP®) designation from The American College of Financial Services. A financial planner’s RICP® education also provides advanced training in retirement income planning strategies that help investors create their most secure financial future.

When investors work with an RICP®, their unique needs and challenges are tantamount to creating a retirement income plan that keeps them on track towards their goals. Learn more about becoming an RICP®  and how the the designation leads to greater professional development and a more successful career as a financial planner.