Bucket drawdown strategy, what to put in medium term bucket?

Lostweekend

Thank you @dunstonh

dunstonh said:

The middle bucket often involves using short-term gilts/currency-hedged bonds and sticking to large-cap developed equities with a lower equity ratio compared to the long-term bucket.

Do you mean here that the middle bucket uses raw gilts or funds?  Also are you saying that there are also equities in the middle bucket as well as gilts/bonds?  I'm not sure what you mean by a 'lower equity ratio' in this context.

dunstonh said:   

 You don't use bucketing to make the most money.  You use it so smooth out the volatility and avoid cashing in units during most negative periods (ie. refloat the cash pot after positive periods but do not refloat during negative periods).

I agree and appreciate bucketing reduces potential long-term returns. For me it is about dealing with potential (inevitable) downturns. So far the property element of my portfolio has insulated against the effect of the blips of the past few years (or at least it has appeared so, thankfully individual property values don't update daily on the web). Once the property is sold my interests will be entirely equity funds, bonds/gilts and cash.

JohnWinder

'I agree and appreciate bucketing reduces potential long-term returns'

' You don't use bucketing to make the most money.'

'I agree  bucketing is much less desirable if you are focussing on maximum long lerm return '

'research has shown that statistically, bucketing will reduce your long-term returns on the vast majority of occasions'

Can you point to the research, that we might read it?

Mrs B (for bucket, pronounced bouquet) retires with a bucket portfolio of cash, short-term gilts  and large-cap developed equities, and some equities etc in the third bucket.

Mrs O(ther) retires on a portfolio of cash, bonds and equities etc in the same proportions as Mrs B, drawing from them to keep the mix roughly matched to her risk tolerance. Why would one portfolio have different long term returns than the other, or indeed different volatility?

Edit: I meant to ask why would bucketing reduce returns? Knowing that, there might be some remedial action to take.

MK62

JohnWinder said:

'I agree and appreciate bucketing reduces potential long-term returns'

' You don't use bucketing to make the most money.'

'I agree  bucketing is much less desirable if you are focussing on maximum long lerm return '

'research has shown that statistically, bucketing will reduce your long-term returns on the vast majority of occasions'

Can you point to the research, that we might read it?

Mrs B (for bucket, pronounced bouquet) retires with a bucket portfolio of cash, short-term gilts  and large-cap developed equities, and some equities etc in the third bucket.

Mrs O(ther) retires on a portfolio of cash, bonds and equities etc in the same proportions as Mrs B, drawing from them to keep the mix roughly matched to her risk tolerance. Why would one portfolio have different long term returns than the other, or indeed different volatility?

In the early years, they probably won't, but Mrs O's overall portfolio allocation will stay relatively static while Mrs B's might steadily change over the years.........after say 20 years, the portfolios might look quite different. However, there is no way to know whose portfolio would fare better.......hence the never ending debate on the differing withdrawal strategies.
Also, there are numerous ways to implement and maintain a bucket strategy......some are fundamentally different, to the degree that they aren't really the same strategy at all.

zagfles

Also worth looking at dynamic asset allocation strategies like "prime harvesting", they sound more complicated than "bucketing" strategies but are probably easier to implement. See Dynamic asset allocation and withdrawal in retirement - Monevator

Linton

JohnWinder said:

'I agree and appreciate bucketing reduces potential long-term returns'

' You don't use bucketing to make the most money.'

'I agree  bucketing is much less desirable if you are focussing on maximum long lerm return '

'research has shown that statistically, bucketing will reduce your long-term returns on the vast majority of occasions'

Can you point to the research, that we might read it?

Mrs B (for bucket, pronounced bouquet) retires with a bucket portfolio of cash, short-term gilts  and large-cap developed equities, and some equities etc in the third bucket.

Mrs O(ther) retires on a portfolio of cash, bonds and equities etc in the same proportions as Mrs B, drawing from them to keep the mix roughly matched to her risk tolerance. Why would one portfolio have different long term returns than the other, or indeed different volatility?

Edit: I meant to ask why would bucketing reduce returns? Knowing that, there might be some remedial action to take.

A range of quotes from a range of people.  To focus on my quote:

It doesnt need research as its simply a matter of basic design principles.  You could have several distinct objectives for your investing.  It makes sense to align your investments with your objectives.  Bucketing provides a simple framework in  which to do that, with each bucket focusing on its distinct objectives.  If your only objective is to achieve maximum long term return then why would you need more than one bucket?

The same consideration also answers the other questions.  With each bucket focussed on a distinct subset of  objectives the  underlying investments in one bucket will almost certainly not  be optimally appropriate for meeting the requirements of another bucket. For example managing capital volatility in an income portfolio is pretty unimportant whereas it may be a major concern to managing short/medium term investment total returns.  The volatility (or returns) of the portfolio as a whole is of zero importance.

Of course Mrs B could design her buckets and Mrs O could put them all together in a single portfolio.  However Mrs O would still be operating a bucket policy but it making it much more difficult to manage, perhaps needing a spreadsheet to identify which investments are included in which bucket - virtual bucketing if you like.

gm0

Reference:  McClung - Living off your Money.

Comparative access methods

Variable Income

Portfolio shape sensitivity

US, International and MC sim testing results applied to the above.

GazzaBloom

I have thought about bucketing but it all falls down for me when I get to the topping buckets up part. So, I decided that a simple 2 asset “barbell” portfolio with 80% risk-on (accumulating equity index funds) and 20% risk-off (cash - currently earning 5.25% interest) is my preference.

I plan to draw down proportionally and rebalance annually starting April 2025.

Linton

GazzaBloom said:

I have thought about bucketing but it all falls down for me when I get to the topping buckets up part. So, I decided that a simple 2 asset “barbell” portfolio with 80% risk-on (accumulating equity index funds) and 20% risk-off (cash - currently earning 5.25% interest) is my preference.

I plan to draw down proportionally and rebalance annually starting April 2025.

Yes I agree that with bucketing you need to have a topping up strategy.  But I dont see how your "waterfall" model where money flows down through the buckets in this simple way provides significant benefits compared with say just holding VLS80?  Or do you do something different in a crash? But then you run into timing problems.

Bostonerimus1

I've never really understood what a chronological buckets strategy adds to a basic asset allocation way of organizing a retirement portfolio. I is I suppose a good way to sell personal finance books. However, I'll play along and say that the "middle" bucket should consist of bond funds with average durations similar to the time scale of that bucket ie maybe 5 to 10 years. However, if you have DBs and SPs for income I'd design a portfolio to take account of the guaranteed income you'll have and your projected income needs and your attitude to risk and estate planning. That might end up with very few fixed income products like bonds.

dunstonh

I've never really understood what a chronological buckets strategy adds to a basic asset allocation way of organizing a retirement portfolio.

The expectation, where it is appropriate, is that people will be drawing an amount that is likely or has a good chance of eating the capital.    So, if £xxx may only be invested for say 5 years, then the asset mix should reflect that timescale.  If £yyy is going to be invested for 10 years, you can take a bit more investment risk and if £zzzz is going to be invested for 20+ years, a bit more risk still.

If you are drawing an amount that is sustainable with capital erosion not expected, then bucketing is not really of much use beyond a cash float.