Questions for other "buckets people"

[Rich_by_the_Bay]

OK, bucketeers. If you follow any flavor of a 3-bucket Lucia-like plan I have two questions I have not quite figured out:

1. Would you consider TIPS as a bucket 1 or bucket 2 type asset? It has qualities of both to me; some volatility but locked in income potential regardless of inflation, etc.

2. Same question for Wellesley-like funds; it's a hybrid/balanced fundthat I'm perceiving as a B2 investment, yet like many such funds it has up to 40% real stocks so part of it is a bucket 3 investment. Since the stocks are dividend-producing I am keeping it all in B2 rather than slicing it up. Agree?

The more I play with the concept the more I like 3 buckets. I was hung up on the idea of sequentially depleting B1 then B2, but now that I'm seeing B2 as a more flexible "money sink" or buffer, it seems to work out well for me. I'm also simplifying greatly in my Bucket 3 and it's starting to feel quite comfortabe.

I see no magic in buckets but it keeps me thinking clearly as to asset allocation with a nice peace-of-mind bonus.

 

[ziggy29]

1. Would you consider TIPS as a bucket 1 or bucket 2 type asset? It has qualities of both to me; some volatility but locked in income potential regardless of inflation, etc.

I would consider short-term TIPS to be Bucket 1 and long-term TIPS to be Bucket 2. I would probably draw the dividing line at about a 3- to 5-year maturity; shorter maturities than that are stable enough even with interest rate changes that I'd consider it relatively "safe" money.

I would do the same for bonds and fixed-income securities, too. The very short end would be Bucket 1, and longer-term bonds (preferably laddered and held to maturity) would be Bucket 2.

2. Same question for Wellesley-like funds; it's a hybrid/balanced fundthat I'm perceiving as a B2 investment, yet like many such funds it has up to 40% real stocks so part of it is a bucket 3 investment. Since the stocks are dividend-producing I am keeping it all in B2 rather than slicing it up. Agree?

All things considered, I'd probably consider a "balanced" fund to be Bucket 2, though it depended on the asset allocation of the specific fund. That's one reason I tend to avoid balanced funds -- less direct control of the asset allocation.

The more I play with the concept the more I like 3 buckets. I was hung up on the idea of sequentially depleting B1 then B2, but now that I'm seeing B2 as a more flexible "money sink" or buffer, it seems to work out well for me. I'm also simplifying greatly in my Bucket 3 and it's starting to feel quite comfortabe.

The way I see it, Bucket N+1 can "feed" Bucket N when the former performs very well. So if B3 performs very well, you can sell off some of B3's assets to extend the "lifespan" of B2, which in turn can do the same for B1. The more years of income you have in B1 and B2, the less likely you are to need to tap into B3 in a bear market which is the worst time to need to sell your stocks. Sell high, don't sell low...

 

[WilliamG]

I have Wellesley and Vanguard TIPS fund and consider them both bucket 2. Perhaps you've already seen this Morningstar article on Asset Allocation fund and Wellesley. Fyi, I also have AA fund and consider it bucket 1.

http://news.morningstar.com/article/article.asp?id=167791&QSBPA=Y

 

[Rich_by_the_Bay]

I would consider short-term TIPS to be Bucket 1 and long-term TIPS to be Bucket 2. I would probably draw the dividing line at about a 3- to 5-year maturity; shorter maturities than that are stable enough even with interest rate changes that I'd consider it relatively "safe" money.

Sounds sensible. One down side might be a prolonged burn on bucket 1 which distills down to your TIPS holdings in a low inflation era. But at least the principle is protected and it's still better than a checking account. I'm mostly in short term federal bonds for B1, maybe a year or two in a decent MMF.

 

[hogwild]

My plan is to only have money market funds in my bucket #1 since they are currently paying 5+%. I plany to put conservative balanced funds in my bucket #2.

I have both of Ray's books, but am only through the first section of the second book now. I plan to finish it next week while on vacation.

 

[mathjak107]

anything that can go down in value is more appropriate in bucket 2. all my short term bond funds are a 2.

 

[Rich_by_the_Bay]

anything that can go down in value is more appropriate in bucket 2. all my short term bond funds are a 2.

That's understandable though a little more conservative than my approach: I'll go with short term federal bonds in B1; maybe combined with 2-3 years in a good MMF. The Vg MMF's 10 year annual return is about 3.6% v. over 5% for the STF Bond fund with a share price over 10 years that has stayed between 10.15 and 10.80 for over 10 years. It's my way of tempering having 28% of my nest egg in cash or near-cash.

Are you including MMFs as a holding that can go down in value?

 

[MooreBonds]

OK, bucketeers. If you follow any flavor of a 3-bucket Lucia-like plan I have two questions I have not quite figured out:

I haven't read Ray's books, so I don't know the exact definitions....but if you have hybrids, why not allocate 1/2 of the account value (or some other portion) to one bucket, and the other portion to another bucket? If you need to draw it down, you can draw other non-hybrid positions down to $0 in the bucket before touching the hybrids, and then move down to the next bucket.