I think I might be a bucket system guy...

[OldShooter]

It is true that we don’t know what the future holds or what investments will do in the future. But we do know what markets behaved like in the past and that is the best evidence we have of what they will behave like in the future. Everyone who uses FIRECalc to help them decide if they can retire depends on “backtest simulations”. If you have better evidence to use, please provide it. I am certainly open to persuasion based on superior evidence.

Actually, Taleb's Turkey illustrates the inductive reasoning problem best: https://www.businessinsider.com/nassim-talebs-black-swan-thanksgiving-turkey-2014-11

"Using inductive reasoning to forecast future events poses, for Taleb, not just something potentially useless or wrong, but something that actually has negative value. 'Consider that [the turkey's] feeling of safety reached its maximum when the risk was at the highest!' Taleb writes."

Re "better evidence," there is none except to remember that a paranoid wariness is needed. Another example, a story possibly apocryphal but worthwhile anyway:

One day well prior to D-day, the army Met (meteorological) office received a request from SHEAF for a weather forecast on a specific day a couple of months in the future. "Impossible," they said and this was relayed up the chain of command. Back down came the order: "A forecast is required for planning purposes."

We have FireCalc "for planning purposes."

Beyond that, all I can do is to recommend Taleb's books "The Black Swan," "Fooled by Randomness," and "Antifragile." https://www.amazon.com/Incerto-4-Bo...qid=1588444390&sourceid=Mozilla-search&sr=8-1 ( i have not yet read #4).

 

[Navigator]

The “it’s hard” comment has been brought a couple times now. I am a putz with spreadsheets and I had it up and running in less than hour using Google Sheets and updates take 5 minutes on a weekend. My link up thread to the Retirement Manifesto includes the basic forms even.

Again it’s not a way to get the last buck out of your portfolio. Return optimization. It’s a way to make sure you have a buck left in your portfolio. Success optimization. People seem to miss that point.

You make a fair enough point about the ease of setting up a spreadsheet. As to having a buck left in your portfolio, there are a couple of components that must be added to the discussion: portfolio withdrawal rate and timeframe. I have not read anything on the survivability of portfolios using the bucket method, but would certainly like to see this. I suspect this method is not really any safer than a traditional asset allocation for a long term retirement. During a downturn, bucket portfolios become more risky (i.e., because cash is used up they have an increasingly higher proportion of stocks and are therefore more volatile). During a prolonged downturn the safe bucket can be exhausted, meaning depressed equities need to be sold. If, to prevent this, one carries a large cash reserve, this means overall performance suffers and hence a lower withdrawal rate is safe.

 

[OldShooter]

... During a downturn, bucket portfolios become more risky (i.e., because cash is used up they have an increasingly higher proportion of stocks and are therefore more volatile).

In a downturn, the bucketeer's equity % is almost for sure going down and not up. It's a horse race between his spending and Mr. Market, but Mr. Market is probably declining in a downturn faster that the fixed-side balance is declining. So the bucketeer's portfolio volatility probably declines.

But he doesn't care one way or the other because volatility is not risk. As long as I don't have to sell/SORR, volatility has no effect on me. This popular but strange idea that volatility and risk are the same comes I think from Markowitz, an identity that gave him something he could measure and, then leaping to assume a Gaussian distribution of prices, he could play endless mathematical games. Except for SORR, risk is Enron, Sears Holdings, Montgomery Ward, GE, Theranos, JDS Uniphase, Boeing, ... Not volatility. And the whole purpose of making sure I have enough in my buckets is to avoid SORR.

During a prolonged downturn the safe bucket can be exhausted, meaning depressed equities need to be sold.

Not obvious, because the orthodox* AA-er is depleting cash by buying equities as well as by withdrawing living expenses. I would speculate though, that if the dollar value of his fixed-side AA declines to the poor-sleeping level, he will be come a closet bucketeer and stop buying equities.

If, to prevent this, one carries a large cash reserve, this means overall performance suffers and hence a lower withdrawal rate is safe.

I see no reason that a bucketeer's fixed-side portfolio needs to look any different than an orthodox AA-er's portfolio.

As I have said, IMO thinking of "buckets" is a useful point of view. Beyond that I don't think that religiously following mechanistic formulas is a real-world view of how people behave. So all of this blather is really Socratic dialog rather than having serious real-world relevance.

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*By "orthodox" I mean an AA-er who religiously follows his rebalancing rules.

 

[Navigator]

As I have said, IMO thinking of "buckets" is a useful point of view. Beyond that I don't think that religiously following mechanistic formulas is a real-world view of how people behave. So all of this blather is really Socratic dialog rather than having serious real- world relevance.

Well there is always that.

 

[schellem]

I recall looking at buckets and as mentioned in another post it seemed to come back to a conventional AA at the end of the day.

What I didn't like about buckets was there seemed to be no specific rationale for refilling buckets. If the refilling was just a cascade then it isn't very different from a conventional AA. If it was refilling only where stocks exceed target the I can do that with a conventional AA by just having a decision rule to rebalance stocks only where they exceed target.

For me it was a pretty useless exercise.

I recently read an article in the AAII journal about how\when to refill the buckets. The article was on a chapter in the 'Investing at Level 3' book and it's based on comparing a bench marks current level against historical levels. I'm thinking I may follow this methodology more than anything because it is clear written plan on dealing with the buckets.

 

[COcheesehead]

You make a fair enough point about the ease of setting up a spreadsheet. As to having a buck left in your portfolio, there are a couple of components that must be added to the discussion: portfolio withdrawal rate and timeframe. I have not read anything on the survivability of portfolios using the bucket method, but would certainly like to see this. I suspect this method is not really any safer than a traditional asset allocation for a long term retirement. During a downturn, bucket portfolios become more risky (i.e., because cash is used up they have an increasingly higher proportion of stocks and are therefore more volatile). During a prolonged downturn the safe bucket can be exhausted, meaning depressed equities need to be sold. If, to prevent this, one carries a large cash reserve, this means overall performance suffers and hence a lower withdrawal rate is safe.

You completely overlook the income bucket, bucket 2, which refills the safe bucket or bucket 1.

 

[volfan]

Good catch. Turns out I did the same thing -- I own VYM and I placed it in Bucket #3. I did leave Wellesley in Bucket #2 as I thought that was appropriate.

Here is how I decided to organize the buckets in my spreadsheet:

Bucket 1: 2-3 years spending. Cash, MM, Short-term CDs, Short-term bonds, I-bonds > 5 years old.

Bucket 2: 7-8 years spending. Intermediate & Total Bond, Longer-term CDs, Income funds (Wellesday), Rest of I-bonds

Bucket 3: Everything else

Other people's investment portfolios will look different and they would have to decide the placement for themselves. My ST Bonds are mostly treasury so they went into bucket 1. The I-bonds could have gone in either bucket 1 or 2 due to their nature (never lose value) so splitting them out by age is a bit arbitrary.

Like other posters I am using the bucket method to create another view of my portfolio, I am not using it as my primary method of managing it. I do like how it defines MIN and MAX for buckets 1 and 2 and that could be very useful for rebalancing in a severe downturn. I think it would be easier to sell bonds to buy stocks at dow 15,000 as long as I kept the MIN value intact.

Just curious, if you had access to a Stable Value Fund (paying about 2.45%) in your 401k or 457b, which bucket would you count that money in? I also enjoying the writings from the Retirement Manifesto. Looking forward to purchasing his new book.

 

[Linney]

Just curious, if you had access to a Stable Value Fund (paying about 2.45%) in your 401k or 457b, which bucket would you count that money in?

I would put it in Bucket 1 if the funds could be accessed without penalty, otherwise Bucket 2. That's just my opinion, your reasoning might be different.

I also enjoying the writings from the Retirement Manifesto. Looking forward to purchasing his new book.

Thanks for mentioning this! I will look for this as I also enjoy his writings.