The Bucket Strategy: How to Ignore the Stock Market for 5 Years
The Bucket Strategy: How to Ignore the Stock Market for 5 Years
๐ WHO THIS IS FOR
- Target Profile: Retirees with $1Mโ$5M portfolios who experience anxiety during market volatility.
- Primary Objective: Psychological Stability & Liquidity Management (Preventing panic selling).
- Not Suitable For: Aggressive investors who are comfortable with 100% equity volatility or those with guaranteed pensions covering 100% of expenses.
EXECUTIVE SUMMARY
- The Problem: In a 60/40 portfolio, everything is mixed. When the S&P 500 drops 20%, you see your total balance drop 12%. You panic because you think, “My grocery money is disappearing.”
- The Solution: Time-Segmentation (Bucketing). You divide your money based on when you need to spend it.
- The Structure:
Bucket 1 (Now): 2 years of expenses in Cash. (Safe).
Bucket 2 (Soon): 5 years of expenses in Bonds. (Stable).
Bucket 3 (Later): Everything else in Stocks. (Growth). - The Payoff: When the market crashes, you don’t care. Your “Stock Bucket” is down, but you aren’t touching that money for 7+ years. Your “Spending Bucket” is full. This mental accounting prevents disastrous mistakes.
Retirement is not a math problem; it is a behavioral problem. Spreadsheets say “Total Return” is optimal. Real humans say “I can’t sleep.” The Bucket Strategy aligns your portfolio with your liability timeline. It creates a “moat” of liquidity around your lifestyle, forcing you to buy low (refill buckets) and sell high (trim buckets). According to Team BMT Analysis, this framework is the most effective antidote to “Sequence of Returns Risk” for the emotional investor. Source: Evensky & Katz / Michael Kitces Research
Scenario: You need $100k/year. Market crashes 30%.
- Behavior of 60/40 Investor: Sells $100k of the portfolio (selling stocks at a loss) to live. Destroys capital permanently.
- Behavior of Bucket Investor:
Bucket 1 (Cash): Contains $200k. You spend this.
Action: You do not sell any stocks. You live off the cash reserve.
Recovery: By the time Bucket 1 is empty (2 years later), the market has likely recovered. You then sell stocks (now high) to refill the cash bucket.
Verdict: You successfully timed the market simply by having a buffer.
BMT Verdict: Money has no memory, but it has a deadline. Stocks are safe for a 10-year deadline but dangerous for a 1-year deadline. Bucketing is simply matching the asset’s duration to the liability’s due date. It forces you to be rational when your brain wants to be emotional.
Recovery Time Analysis
| Market Crash Event | Years to Recover (Breakeven) |
|---|---|
| Dot-Com Bubble (2000) | 4.5 |
| Financial Crisis (2008) | 3.2 |
| COVID Crash (2020) | 0.5 |
*Chart Note: Since modern bear markets typically recover within 3-5 years, a “Safety Bucket” (Cash + Bonds) covering 5-7 years of expenses provides a mathematical shield that allows you to outwait almost any historical downturn without selling stocks at a loss.
Implementation Logic: Harold Evensky, the father of this strategy, originally proposed just two buckets: Cash Flow Reserve (1-2 years) and Investment Portfolio. The goal isn’t to complicate the portfolio with 10 buckets, but to isolate “Grocery Money” from “Market Volatility.” Simplicity prevents execution failure.
โ BOUNDARY CLAUSE: This Structure Breaks Down If:
- Cash Drag is Too High: If you keep 10 years of expenses in cash (Bucket 1 is too big), inflation will destroy your purchasing power. You must limit the safety bucket to the minimum necessary (2-3 years usually).
- You Don’t Rebalance: If stocks double and you don’t skim the profits to refill the cash bucket, the system fails. The strategy requires active maintenance during bull markets.
Execution Protocol
Determine your annual net spending gap (Expenses minus Social Security/Pension). Example: Spend $150k, Guaranteed Income $50k. Gap = $100k/year.
Bucket 1 (Cash/Money Market): $200k (2 Years). Yield 5%. Bucket 2 (Short/Interm Bonds): $500k (5 Years). Yield 4-5%. Bucket 3 (Global Equities): Remainder. (Growth Engine).
Spend from Bucket 1. Dividends/Interest from Buckets 2 & 3 flow into Bucket 1. If Bucket 1 gets low, sell assets from Bucket 3 (if stocks are up) or Bucket 2 (if stocks are down) to refill it.
This strategy does not necessarily increase total returns compared to a rebalanced 60/40. Its value is “Behavioral Alpha”โit keeps you invested when you would otherwise quit.
WEALTH STRATEGY DIRECTIVE
- Do This: Use a High-Yield Savings Account (HYSA) or Treasury Bills for Bucket 1. Do not leave it in a 0% checking account. Even safety money should earn 4-5%.
- Avoid This: Thinking Buckets protect you from a 20-year bear market (Secular Stagnation). If stocks are down for 15 years, you will eventually burn through the safety buckets and have to sell stocks low. It is a bridge, not a fortress.
Frequently Asked Questions
Is this better than Total Return?
Mathematically, Total Return (just rebalancing) is often slightly superior because it holds less cash. But Psychologically, Buckets win. Investors stick with Buckets; they abandon Total Return in a crash.
How many buckets do I need?
Three is standard (Cash, Income, Growth). Some use two (Safe, Risk). Don’t do more than three; it becomes an accounting nightmare.
Does this work in an IRA?
Yes. You can segregate assets within an IRA. Hold the Money Market fund (Bucket 1) and Bond Funds (Bucket 2) inside the IRA alongside the Stock Funds (Bucket 3).