Using buckets to plan for uncertainty
Market corrections can last for years. How can investors be reassured they won’t be forced to sell their valuable stocks when prices are down?
One way is to use a bucket system.
The idea is to split your investments into multiple buckets with the first one holding cash. Maybe the next bucket will hold low volatility stocks or bonds. And the final bucket will be the most high risk investments but should also produce the highest expected returns over the longest period of time.
In practice, when you need to spend your investments, you always draw down your first bucket with the cash. This way you don’t have to sell any of your stocks during a depressed market and risk realizing a permanent loss on your investments.
I explain in further detail in my latest video here.
The advantage of the bucket system is it’s very flexible to your needs. If you’re still working you can save 6 months of living expenses in your first bucket. You can think of the first bucket as an emergency fund. If you’re retired, you can maybe put 3 years of living expenses in the first bucket. You can also have a mix of various asset classes within each bucket. You can label your bucket for medium term goals (2 to 5 years) or long term (over 10 years.) Then you just rebalance once a year.
The point of the bucket system is to help get you through times when market sentiment is unfavorable, and provides better perspective. 🙂
Random Useless Fact:
Learning to sell is a useful skill.