Bucket Brigade

There is a investment metaphor that is being promoted by some of the investment houses. Evidently, it has been around for some time but is just now becoming a major sales tool. Investors are told to put their investments in two, three, or four buckets. Sometimes these buckets are labeled by time horizon and sometime by risk tolerance. The same principles are at work in the so called Lifecycle funds that divide up your assets according to the number of years left before retirement.

The first bucket contains short term money. This is money that you will be spending in the foreseeable future, say the next five years, although different programs define different years and content for these buckets. The theory is that investments in any given year may do well or may get hammered. Therefore, if you know you are going to need to replace that car sometime in the next three years, just leave it in that insured money market fund at your bank or credit union.

The second bucket contains money that might be needed in years six through ten. This bucket contains investments that are still conservative but are less liquid. Examples would include bonds, CDs, and large cap stocks with righteous dividends such as Johnson & Johnson, Exxon, and Altria.

The third bucket invests for years 11 through 20. It would contain moderately risky investments, including mid cap stocks, a little bit of small cap gambles, and some international stock funds. Simply put this is where you would put most of your growth funds money.

The money held in the fourth and final bucket contains money for years 21 through 30. This is where risky investments live, some of your wilder growth stock gambles, options, futures, and collectibles. I wonder what a bat signed by Barry Bonds might be worth in 2040? Hmmm.

Of course the broker will be glad to tailor the contents of each bucket to his client’s risk tolerance, interests, and prejudices. For example I would have most of my money in second bucket kind of investments no matter when I wanted to use that money. I would have a respectable third bucket, but I might not have a fourth bucket at all. That might be a mistake. Also the broker will be happy to manage the size of each of your buckets, rebalancing as you continue your journey through this valley of tears.

So called lifecycle funds offer a variation on this theme by using a mix from a family of mutual funds that is age appropriate. I am familiar with the Thrift Savings Plan offered Federal employees under the new retirement system so I will use those offerings as an example of what is available.

The Funds
G – Government Bonds
F – Investment Grade Bonds
C – Common Stock Index Fund (least risk for stock funds)
S – Small Cap Index Fund (greatest risk for stock funds)
I – International Index Fund

These offerings can be prepackaged according to your retirement date. Here are some examples of the current mixes.

L Income (for those who are already retired)

G 74%
F 6%
C 12%
S 3%
I 5%

L 2020 (for those who will retire between the years of 2015 through 2024)

G 35.8%
F 7.45%
C 30.15%
S 9.8%
I 16.8%

L 2030 (for those who will retire between the years of 2025 through 2034)

G 22.05%
F 8.45%
C 35.08%
S 13.80%
I 19.90%

L 2040 (for those who will retire between the years of 2035 through 2044)

G 11.05%
F 9.45%
C 39.80%
S 16.90%
I 22.80%

L2050 (for those who will retire after 2045)

G 3.5%
F 7.0%
C 43.80%
S 18.90%
I 26.80%

Just a note, if you decide you like lifecycle fund idea for retirement, you will still need to fill that first bucket at your bank or credit union.