Bucket Investment Strategy: Bucket #3 Is for Long-Term Growth

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By Scott Keegan, Associate Wealth Advisor

To wrap up my series on bucketing, I want to look at Bucket #3. To get a full picture of the bucketing system, check out our previous blogs on Bucket #1 and Bucket #2.

The Bucketing System can be good framework for people who are in or nearing retirement. Some may find that utilizing Bucket #1 and Bucket #2 strategies helps provide confidence in their retirement planning.

While more conservative investment can give that financial confidence, there also needs to be a portion of the portfolio that is more aimed at growth, or else we risk outliving our money if it isn’t growing as we go through retirement.

Bucket #3’s Job

Bucket #3’s job in the portfolio is to invest for long-term growth. The goal of this bucket is to fund the second half of retirement or provide a legacy to beneficiaries. This is the portion of the portfolio that will not be needed for expected expenses or distributions for at least six years. This allows us a good time horizon for these investments to grow, whereas the money in Bucket #1 or Bucket #2 will be needed in the near future by the client.

Because this money is invested for more long-term growth, this bucket is often more geared toward stocks than bonds. We often remind clients in retirement that not all stocks are created equal. By this, we mean that owning a share of Berkshire Hathaway gives a more confident feeling than owning a share of GameStop or AMC. We tend to favor value stocks that pay dividends and are not highly volatile to make up the majority of Bucket #3 for clients in retirement.

In terms of performance, Bucket #3 generally does the majority of the “legwork” because this is where we get more growth in the overall portfolio. The higher potential for growth also brings in risk to this bucket. We often compare the buckets to an old-fashioned spring doorstop; if you bent it and let it go, one end will fly back and forth while one end is secured to the wall:

  • Whether the market is going up or down, we expect Bucket #1 to be secured to the wall and not experience much movement.
  • Bucket #2 in the middle should move a little.
  • Bucket #3 would be the end, going up and down following the market fairly closely.

Bucketing becomes so valuable because we have time on our side when investing in Bucket #3 and we know we don’t need this money for at least six years. We don’t have to sell at market lows to produce income (that is Bucket #1’s job).

We have staying power to wait for the markets to come back before we make any moves in Bucket #3. Once the market comes back from a correction, we can rebalance and secure profits from Bucket #3 and refill any distributions we have taken out of Bucket #1 or Bucket #2.

Bucketing can be a very good system for retirees to utilize in an attempt to protect their income to help ensure their risk levels are in line with their financial plan.

Schedule a no-obligation conversation to discuss what your buckets should look like.

 

This piece is not intended to provide specific professional advice. To determine what is appropriate for you, consult a qualified professional. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Rebalancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional.

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