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Re: Buckets of Money Strategy
Old 10-23-2003, 01:28 PM   #21
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Re: Buckets of Money Strategy

I'm going to take issue with Grangaard's statement that only 3 ten-year periods of stock return were negative. By my numbers, there were 8 ten-year periods when REAL "stock" returns were negative, 8 out of 68, from 1926 to 2002. There were 30 ten-year periods (out the 68 ten-year periods) when the REAL "stock" returns did not double your money. And then there were 38 ten-year periods when the REAL "stock" returns did double or more than double your money.

Remember to think in terms of Total Returns, not annualized or average returns. So, if someone gives you 6%/year for 10 years, that's 179% in total returns. There were 23, out of 68, ten-year periods, from 1926-2002, when the total REAL stock returns were less than this. 23/68 = 34%. 66% is not really the vast majority of 10-year time periods, is it?

I used the Wilshire 5000 as a proxy for "stocks". If you use the S&P 500, you get almost the same thing. With the S&P 500, there were 7-ten year periods with negative real returns, 33-ten year periods, out of 68, when the real stock returns did not double your money, and 25-ten year periods, out of 68, when the real total returns were less than 179%.

As for having more total money than you started with 10 years prior (in REAL terms so you can keep your withdrawals inflation adjusted), you pretty much have to double your stock money, in real terms, if your portfolio is 50/50. This is assuming you spend the 50% bonds in the previous 10 years. With equity returns most likely going to be lower in the future, I seriously doubt that this is likely to happen. So, it's probably good to keep your withdrawal % down to 4% and under.

Now, having said that, I think the "bucket" idea is a very good one. Though, I do have a problem with the way the portfolio is rebalanced. Assuming you let the stocks ride for 10 years, and don't rebalance, at the end of the tenth year, you have 0% in cash/bonds and 100% in stocks. As time progresses towards the tenth year, your portfolio becomes more and more concentrated in stocks. That doesn't really make me feel very comfortable.

I'd rather use a modified version of the "buckets" and withdraw from the bond/cash portion of the portfolio when stocks are not doing well (like a bear market), and then take withdrawals from the stock portion when the stock market is doing well. You can still protect your stocks (and not reverse- DCA) in bear markets this way. Frank Armstrong explains it better:

http://www.investorsolutions.com/Pre...retirement.pdf

Did the Grangaard book take the strategy and extend it to subsequent 10-year periods? For example, start in in years 1926, 27, 28,...,1972, 1973:

(1) Spend the bond portion totally within each ten years, then
(2) Replenish the bond portion from the stock portion, then
(3) Let the remaining stock portion grow for the next ten years, then
(4) Replenish the bond portion from the stock portion, then
(5) Let the remaining stock portion grow for the next ten years,
(6) and so on for 30 or 40 years for each starting year.

I tried a simulation spreadsheet for a 5% withdrawal rate, and got pretty bad results after 30 years of retirement. For 30 years, I got 24 successes and 24 failures. For 40 years, it was about half and half again. 4% did better, but still 13 failures (ran out of money) at 30 years.

- Alec
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Re: Buckets of Money Strategy
Old 10-24-2003, 10:27 AM   #22
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Re: Buckets of Money Strategy

Hey, Alec

Thanks for confirming my suspicions about the limitations of the Grangaard approach.
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Old 06-05-2009, 04:08 PM   #23
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(Apologies if anyone feels this one's been done to death...)

So, who here's retiring on the Lucia "buckets of money" plan? How's it working?

(I'm on teacups of money now, but working towards pints of it. )
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Old 06-05-2009, 04:48 PM   #24
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Not retired yet, but poised and ready with a 3 bucket portfolio.

I have modified the strategy to better suit my needs and values. In "pure Lucia mode" you would draw down all of buckets 1 and 2 in sequence leaving yourself very heavily in stocks at an older age, then do the mother-of-all rebalancing 14 years from now. Historically that's fine and you'd probably do well.

I'd rather not do quite so well but sleep better at night. So I plan a light rebalancing during good years. Ray would prefer that you not do that very much, and that you have a chunk of non-traded REITs to assure cash flow even when stocks are down. I'll pass on the non-traded REITs and keep my allocations closer to their original numbers. I also plan take 4.5% ot total assets each year (rather than inflation-adjusted 4%), with a 95% of last year's SWR as floor, per Clyatt's recommendation.

Nothing magical here, and it's similar to Armstrong's method though he uses 2 buckets.
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Old 06-13-2009, 12:00 PM   #25
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I like the general approach to a grangaard 2 bucket approach. I see 2 big problems. 10 yrs is arbitrary and at the end you have much too much in stocks. I think you have to consider the amount of income you need vs the amount you have to invest. You should invest no more in stocks than you need to in order to meet your inflation adjusted income needs over your lifetime plus your desire to leave something to your heirs. This could mean that you invest heavily in 5 yr laddered CD's. When your 70.5 you can start drawing out of your stock funds if they are substantially higher. Otherwise use the CD money and wait until the time right.
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Old 06-13-2009, 02:37 PM   #26
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I recently read the book Buckets of Money by Ray Lucia and wondered what some of the forum members think of his approach to retirement withdrawals. He suggests that at the beginning of retirement you create 3 buckets from your funds available for investment. The first is to cover expenses for the first 7 years of retirement he recommends things such as immediate annuities or laddered CDs. The second bucket is for the time frame of 7 to 14 years and contains income-generating vehicles such as fixed annuities and bonds. The third bucket contains stocks and other long-term growth vehicles. The idea is to live off the safe income from bucket 1 for 7 years, then convert bucket 2 to bucket 1 for the second 7 years and after 14 years start all over using the growth from bucket 3. Assuming that your initial funds are sufficient to put quite a bit into bucket 3, it sounds like a reasonable approach. Any thoughts?

Thanks,
Alan
It is about 33% in stocks
In a way that is like Vanguard Retirement Income Fund about 30% in stocks.
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Old 06-13-2009, 03:51 PM   #27
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It is about 33% in stocks
In a way that is like Vanguard Retirement Income Fund about 30% in stocks.
Hmm .. it depends. Mine has about 45-50% in stocks. The number varies with how many years you are covering in Buckets 1 and 2 (it doesn't have to be 7+7 -- lower is more aggressive, higher is less so).

So, there is no fixed B3 percentage -- it depends on the vvariables you choose. I happen to use 6.5y in B1, a fixed 4.5% of annual assets which leaves me with 29%, 26%, and 45% of my allocatioin in buckets 1, 2, and 3. I may crank it down a notch (that is, more years in B1-2) if the market settles.

It's helpful to put it in a spreadseet using the present value formula. These work for me in Google Spreadsheet:

Bucket 2 total is:
=PV(bucket_2_returns, bucket_1_years, 0, fv(inflation_rate, bucket_1_years, 0, bucket_1_target_amt, 0), 0)

(bucket_1_target_amt is the amount you'd need to cover 7 years at your current withdrawal rate assuming 7 years is your preference).

Bucket 1 total is:
=PV((bucket_1_returns-inflation_rate), bucket_1_years,(total_assets * withdrawal_rate),0,1)*-1

Bucket 3 total is whatever is left from your total assets.

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Old 06-14-2009, 11:36 AM   #28
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I think you need to consider the case of rebalancing a taxable
account during the distribution phase of your life. Assuming
you want to leave as much as possible to your heirs and assuming
you need to draw on your taxable account for living expenses then
I think you need to consider one of Vanguard's fine balanced funds
for your taxable money.

A balanced fund does the rebalancing for you automatically and
does not create the sort of tax problem you have trying to rebalance
multiple equity funds and fixed income funds. Believe me, I am 75
and well past the point of wanting that complexity in my life. And
my wife's eyes glaze over when we discuss investments.

So, I think the best stategy for your taxable money is to pick a good
balanced fund (Vanguard's Managed Payout Growth & Distribution
is the one I use) and have a his and hers pair of money market funds.

I borrow a little from the bucket strategy by keeping 3 years of money
that I need to spend from the taxable account in my money market
(Vanguard Federal). Each year I transfer enough money from my IRA
and my taxable MM to DW's money market (Prime) for our yearly
expense needs. DW then transfers her monthly expense needs to her
checking account from her taxable MM each month.

I am in the process of trying to sell my Laundromat. The proceeds from
this will go to my 3 grandkids 529 plans, to the Managed Payout fund
and to my Federal MM. The goal is to build up the Managed Payout
fund to the point where the 5% distribution is sufficient to supplement
SS inccome and RMD's from two IRA's to meet yearly expense needs.

The IRA's are very conservatively invested with the goal of providing
enough income to meet the RMD draw down. DW's is in a 7 year
6.25% CD at PenFed with 1 upgrade grandfathered in. She starts
drawing RMD in 2011.

My RMD is invested in a mix of Wellesley, Managed Payout, GIM,
several 2% + CPI intermediate term bonds and a Prime MM. I
am keeping a 2 year RMD amount in the MM bucket to avoid
reverse DCA during down markets. Besides, the CPI indexed bonds
suck right now (but wait....). I plan to build up the Wellesley and
Managed Payout as the CPI indexed bonds mature.

That's the way it goes for me.

Cheers,

charlie

Edit: Currently I am reinvesting the Managed Payout distributions.
Also, I am not taking RMD this year. The 3 year MM bucket is being
replinished by cashing EE bonds that I inherited last year. This will
continue until the Managed Payout distribution contains a relatively
small "return of capital" component. The "EE bond Bucket" is large
enough to continue this way for 2-3 years if necessary.
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Old 06-14-2009, 05:35 PM   #29
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I read Armstrong the year before I retired and have used his two "bucket" approach pretty much. Now, like Charlie, we use balanced funds to facilitate a lot of the re-balancing along with pure stock REIT and international funds. Kinda think of the balanced as a middle bucket, but have never been attracted to following a Lucia or Grandgaard type strategy very closely. Since in distribution phase we take all our dividends and interest.

Charlie - Am using Balanced Index and Wellington for half of balanced allocation and Wellesley for the other half. Was intrigued by Managed Payout funds but feel management team has not had time to show their merit yet and they sure picked a bad time to kick off! You still feel pretty good about that choice? I see you are re-investing dividends while payouts are largely a return of capital which sounds like a good idea.
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Old 06-14-2009, 08:52 PM   #30
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I read Armstrong the year before I retired and have used his two "bucket" approach pretty much. Now, like Charlie, we use balanced funds to facilitate a lot of the re-balancing along with pure stock REIT and international funds. Kinda think of the balanced as a middle bucket, but have never been attracted to following a Lucia or Grandgaard type strategy very closely. Since in distribution phase we take all our dividends and interest.

Charlie - Am using Balanced Index and Wellington for half of balanced allocation and Wellesley for the other half. Was intrigued by Managed Payout funds but feel management team has not had time to show their merit yet and they sure picked a bad time to kick off! You still feel pretty good about that choice? I see you are re-investing dividends while payouts are largely a return of capital which sounds like a good idea.
Armstrong makes sense, but his withdrawal strategy is kind of murky. Suppose bonds are up this year, but not enough to totally support your annual income needs. Do you withdraw from bonds and then the balance from stocks? Or do you take all you need from bonds, even if it exceeds the gains for that year? How long and how much do you take from bonds if you hit several years of a bad stock market?

Balanced funds are fine for accumulation but make it difficult to withdraw a specific amount from bonds vs stocks since in a balanced fund they are glued together.

I like Frank Armstrong's approach, but Lucia's buckets seem to be more specific and realistic for me.
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Old 06-14-2009, 10:15 PM   #31
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WilliamG, yes the Managed Payout funds do not have a track record but
if you look behind the curtain, they are invested in index funds except
for some Intermediate Term Investment Grade and the Market Neutral
component. Personally, I wish they would ditch the Market Neutral
and use those funds for the REIT index and perhaps the Energy fund.

I like Managed Payout because I think it is the most diversified of all
Vanguard's balanced funds. I particularly like the fact that international
is about 30% of the total equity commitment. The max for other
balanced funds is about 20% if I am not mistaken. I also like the
concept of monthly payout based on average of the trailing 3 year NAV.
Hopefully the payout will increase with time to compensate for inflation.

I use Wellington and Balanced Index as benchmarks for the 5% Managed
payout fund. Both are slightly behind Managed Payout Growth and
Distribution this year.

Time will tell, but I think this fund will catch on eventually. I just hope
Vanguard does not get discouraged and discontinue it.

Cheers,

charlie

PS: I understand Tampa's concern about being able to select draw down from
stock or bond funds. My strategy is to reinvest distributions during bad
years as long as I can do it to avoid reverse DCA.
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Old 06-15-2009, 08:23 AM   #32
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Charlie - Vanguard getting discouraged is probably the biggest worry but I think that's probably pretty unlikely. We will probably look at one of these again in a couple of years. One possible drawback is reverse dollar cost averaging as you mention. You are taking action on that right now and the basis of these funds is that at least you have some professional active managers handling this withdrawal of highly diversified assets for you.

Rich - All we have of Frank Armstrong method now is the concept of a "safe" bucket. We do NOT reinvest dividends and then pick something to sell. Right now the combination of safe withdrawal pot and our income stream is working out pretty well. Re-balancing happens less frequently (based on allocation triggers) and will be the opportunity for adding back to safe bucket when appropriate.
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Old 06-12-2010, 11:32 PM   #33
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Well, I'm not really arguing with Grangarrd or Lucia. I'm sure they've done their research and I haven't detailed it to death as , I hope, they have. BUT.. how about 1929-1939? Or 1973-1983? I dont think the stock market did that well expescially on a real return basis during those 10 yr periods.'

And you'd need to make enough to clear inflation and fund the next 10 yrs PLUS have enough to keep in the market to do the same thing 10 yrs hence.
I ran across this thread while searching for Lucia's "Buckets of Money" method. I wonder what the thread posters think now, 8+ years after the original postings, after a period in which the S&P 500 once again fails to show a gain after a 10+ period, and after passing through one of the worst corrections in the history of the stock market. Some bear market cycles last 18 years or more, so I myself am not convinced of the soundness of investing in any of the broad indices. A focused investment strategy, picking individual stocks or sectors, and putting most of the money in safe investments makes much more sense.

I myself only have 33% in equities, and of this, 25% is in preferred stocks, which are similar to bonds. I can live off the pension I will receive upon retirement in 18 months, at the end of 2011, so I really don't need to worry about "buckets" of money or having to exhaust my savings. I think conservative living and investing are the best keys to successful retirement, not "buckets of money" or having lots of broad based equities. The fundamentals of the current economy simply do not justify following the portfolio allocation theory that says a mix of diversified equities and income investments result in maximum return. The future of equities is too hard to predict.
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Old 06-13-2010, 01:57 AM   #34
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. . .so I myself am not convinced of the soundness of investing in any of the broad indices. A focused investment strategy, picking individual stocks or sectors, and putting most of the money in safe investments makes much more sense.
I myself only have 33% in equities, and of this, 25% is in preferred stocks, which are similar to bonds.
What are "safe investments"? I.e. if inflation goes to 9%, LT bonds are not safe investments. Some investors believe they have achieved safety with a large sector bet in gold. Historically, a portfolio with a small equity component has had a tough time keeping up with inflation and generating enough growth to satisfy the withdrawal demands that many retirees have. Basically, you are saying "it's different this time," and maybe you'll be right, but people say that all the time.

Individual stocks and sector bets are generally more risky (have higher volatility) than more broadly based approaches. Again, unless one is blessed with the ability to outsmart the market. Most people can't and don't.

There's nothing magic about the bucket approach, and I'm not a Lucia disciple. But, the method does have the advantage of being rule-driven which takes the emotions out of the mix. That's usually a good thing. And, because it has defined parameters, one can see how it has performed in the past. To me, that's useful.

I fully agree with the need to LBYM and to have a sufficient sized portfolio to start with.
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Old 06-13-2010, 06:30 AM   #35
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Several members of the board have used the "bucket" approach to their thinking of asset allocation. Yes a rose by any other name.... but I found that Lucias book made me think a little differently about asset allocation, even if it's only a mind game.

By mentally separating the allocations I found it easier to establish my risk tolerance. I used CDs to build my first "bucket" and I'm glad I did. During this last crisis I was sitting with a bunch of CDs collecting 6% (and still am). I wound up with more of an Armstrong two bucket strategy at the end.

A good asset allocation is key and any strategy that gets you their is probably a good thing.
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Old 06-13-2010, 07:06 AM   #36
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I wonder what the thread posters think now, 8+ years after the original postings, after a period in which the S&P 500 once again fails to show a gain after a 10+ period, and after passing through one of the worst corrections in the history of the stock market. Some bear market cycles last 18 years or more, so I myself am not convinced of the soundness of investing in any of the broad indices. A focused investment strategy, picking individual stocks or sectors, and putting most of the money in safe investments makes much more sense.
This should probably go in one of the "Lost Decade" threads. The conclusion of those threads was that no one invested 100% in the S&P500 index fund. Folks who invested in everything (US, foreign, large-cap, small-cap, and bonds) did just fine. It didn't matter whether they called their accounts buckets or not.
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Old 06-13-2010, 12:49 PM   #37
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What are "safe investments"? I.e. if inflation goes to 9%, LT bonds are not safe investments. Some investors believe they have achieved safety with a large sector bet in gold. Historically, a portfolio with a small equity component has had a tough time keeping up with inflation and generating enough growth to satisfy the withdrawal demands that many retirees have. Basically, you are saying "it's different this time," and maybe you'll be right, but people say that all the time.
This is a good chance for me to explain my current situation and why I am looking at the issue of asset allocation. I have all of my 401-K, which represents 40% of my total financial assets, in a stable value short term investment fund. During the meltdown in the stock market in March 2009, those assets represented 80% of total because the equity values had collapsed. If inflation rises, the return on the stable value will increase accordingly.

I have 25% in preferred stocks of financial/banking companies and one REIT. I bought these to yield over 8%, which I think will keep up with current rates. Unfortunately, I bought these at the very beginning of the collapse in their prices. I have significant amounts in several of these, between 5-6% of total. I have since found some REITs that I'm more interested in owning than these bank preferreds, and that is what has led me to learn more about portfolio allocation. I had recouped my losses and had actually achieved an overall gain on the preferred stocks during the market rally in March, but now am back to significant losses on most of them. I'm looking to sell some of these if and when they recoup their losses, and shift more money into REITs, or just shift the money if I can get equivalent returns on the new investments.

I own 21 equity investments, so I need to figure out what to keep and what to get rid of. I'd like to simply my portfolio.

I can tell you that I am dead set against owning most of the broad indices because they reflect the general economy which, I believe will be distressed for many years to come. This correction has been years in the making and will only worsen before it improves. Politically, the U.S. is trying to be an imperialistic nation without the authority to tax the countries it is trying to include in its protectorate. The cost of the military state is falling on U.S. taxpayers and their ability to pay has become exhausted, even after spending all of the social security "surplus" the funding for which has never actually existed. Every dollar collected for social security has been spent, including the interest the government calculates as accruing to the debt owed to it. This is why I am pessimistic about the economy overall and cannot believe in investing in broad indices for any period of time, no matter how far out one assumes it will take for the return of economic growth. As long as we are willing to import goods made with essentially slave wage labor, production and incomes will continue to contract. Unfortunately, the only exception is the U.S. military arms industry, and this, too is subject to political whims and cycles.
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Lost Decade
Old 06-14-2010, 11:02 AM   #38
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Lost Decade

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This should probably go in one of the "Lost Decade" threads. The conclusion of those threads was that no one invested 100% in the S&P500 index fund. Folks who invested in everything (US, foreign, large-cap, small-cap, and bonds) did just fine. It didn't matter whether they called their accounts buckets or not.
I looked, but could not find the "lost decade" threads. You say that people who invested in everything did just fine. That ignores the fact that the broad equity indices lost money over the decade just ended. People have ignored that the Nasdaq has been in a bear market since its 5,000+ peak in March, 2000. Similarly, as of last Friday, the SP500 is still off 484, or 30.7% from its former peak of 1,576.09. One definition of a bear market is a correction of more than 20%. The markets are well within that range, especially the Naz, which many have been touting as the star of the recovery. I believe that the problem is called overhang, those investors that bought at much higher levels that have lost faith in the market. I don't think that the accumulation is broad based enough to repeat the performance of the past. What we see is the result of mostly institutional buying, and fringe individual buying by those who still believe in the portfolio allocation theory.

The market will continue to claw its way upwards until people realize that there are other things that they can put their money into, and that the market has become artificially inflated. It will continue to be volatile and troubled. I still have a 15% loss on the preferred stocks I bought in 2008, $41,000, even after offsetting the almost 2 years of dividends I have received, not counting the tax I have paid on the income.
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Old 06-14-2010, 11:41 AM   #39
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People have ignored that the Nasdaq has been in a bear market since its 5,000+ peak in March, 2000. Similarly, as of last Friday, the SP500 is still off 484, or 30.7% from its former peak of 1,576.09.
Yes, all those who bought all their investments at the very top of the market are still underwater. There aren't many of those people. One way to keep from becoming one is to avoid hopping around making sector bets.
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What Suze Orman does with her own money
Old 06-14-2010, 02:11 PM   #40
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What Suze Orman does with her own money

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Emphasis added:


Yes, all those who bought all their investments at the very top of the market are still underwater. There aren't many of those people. One way to keep from becoming one is to avoid hopping around making sector bets.
Another way to avoid buying into equities and then being under water is to limit one's purchase of equities to an insignificant amount.

That's what financial guru Suze Orman does. She does not subscribe to the traditional "portfolio allocation theory."

"Orman estimated her liquid net worth at about $25 million, with another $7 million worth of houses. With just $1 million of that in stocks, it means that just 4% of her liquid net worth is in the stock market.
What does Orman do with the rest of her money? Solomon asked, and was told: "Save it and build it in municipal bonds. I buy zero-coupon municipal bonds, and all the bonds I buy are triple-A-rated and insured so that even if the city goes under, I get my money. I take a little lower interest rate to make sure my bonds are 100 percent safe and sound. "
As for playing the stock market, Orman said "I have a million dollars in the stock market, because if I lose a million dollars, I don't personally care."
'Suze is investing as if she was a retired grandmother with no heirs.'


Debra Neiman, Neiman & Associates Financial Services
In short, the person being trusted as everyone's financial adviser has a portfolio that few people could live with."

Full story at Outing Suze Orman's investment portfolio Chuck Jaffe - MarketWatch
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