Short Term Bucket Money - part of AA?

[Chuckanut]

Like many people here I have an asset allocation that I periodically adjust to keep it in the area I have chosen. Also, like many I have some buckets (CD's, MM funds, short term assets) where I keep dollars I will need in the next 3-5 years.

These bucket dollars are used to ensure that one can temporarily ride out market down turns without having to 'sell low' in order to finance one's chosen lifestyle.

My question is this - Do you include this bucket money in your AA or do you ignore it for purposes of balancing your investment AA?


​

 

[REWahoo]

Previous discussion on this topic:

http://www.early-retirement.org/forums/f28/is-it-part-of-aa-or-not-41585.html

 

[Dash man]

I absolutely include it as part of my asset allocation. I keep a certain percentage in cash for the same purpose as you. I currently don't own any bonds, so my cash percentage is relatively high at about 35 %, with stocks/funds and real estate making up the rest.


Sent from my iPhone using Early Retirement Forum

 

[AnIntentionalRoad]

It is part of my AA (a rather large part).

It is kept in CDs and a MM account.

 

[nun]

Buckets are meaningless IMHO.......and AA makes them so.

 

[audreyh1]

I do not include it as my AA, because I don't use it as part of my rebalancing calculation. I also do not use it as part of my withdrawal calculation. I have assets above and beyond what is in my retirement portfolio, and none of them is included in my AA, because they aren't part of my long-term retirement investment.

There is no rule that says your entire nest egg MUST be included in your AA or withdrawal computations. Nothing wrong with using a subset - it's simply more conservative.

My retirement fund is the only portfolio that is managed as an asset allocation, and the only one rebalanced as I withdraw. It's a significant % of my investments, but not everything.

 

[Chuckanut]

Perhaps I should not used the term 'bucket' because people will think I am using the bucket method advocated by some financial planners. I am not.

I simply allocated a lump of cash to be used to supplement my pension income until SS begins at age 70.

The purist in me says this money should be part of the AA regardless of what it is allocated towards. The other side says, since I plan on spending all of it over the next few years it's already earmarked and should not be considered with other investment assets. A third side says to use the variable percentage withdrawal, put any money not spent into a very safe place, and don't worry about the ups and downs of the market.
Ahh.... first world problems.

 

[audreyh1]

The way I compartmentalize my investments is by goal and time horizon and the investment strategies are different. If something is earmarked for a short term expense, then I don't think it makes sense to treat is as part of a long-term investment.

 

[photoguy]

These bucket dollars are used to ensure that one can temporarily ride out market down turns without having to 'sell low' in order to finance one's chosen lifestyle.

My question is this - Do you include this bucket money in your AA or do you ignore it for purposes of balancing your investment AA?
​

I'm not sure there's much practical difference between having an extra bucket vs just running an AA with a slightly higher percentage of (safe) fixed income. If the market tanks, your equity portion will be lower than the setpoint and you will be withdrawing from the fixed income portion anyway.

 

[LOL!]

Part of AA. I also calculate portfolio performance including any and all cash sloshing around in cash sweep accounts or unused in a checking account or CD.

 

[Ronstar]

Part of AA here as well. I track cash like equities/bonds to provide data for rebalancing.

 

[pb4uski]

Part of AA here too. I tried to keep it separate when I first retired but it was more confusing than I like. So I just changed my AA from 60/40/0 to 60/34/6 (equities/fixed income/cash). The 6% of cash represents ~ 2 years pf living expenses less 2 years of taxable account dividends (which i take in cash and effectively reduce my withdrawals).

 

[jazz4cash]

I count this as part of AA, but I am not retired. I do think in terms of buckets because it adds a time component and sets spending priority for the AA....I'm just not quite sure how I will refill the buckets (e.g. rebalance) once I am retired.

So by my way of thinking, once you set this allocation to x-y years (as opposed to using x-y percent), it is in a bucket that you will spend down first. I then calculate the percentage required for x-y years and set my other allocations. If the percentage is more than 4%/yr, I have a problem that needs to be resolved.

 

[Sunset]

Its part of my overall AA as its part of my overall assets.