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Value Creation Blog

A Short Primer to Help You Stay Invested

Posted by Josh Patrick

The_Bucket_System_-_Stage_2_Planning.pngInvesting can be a tricky business. Too often you put all your money in one place. Then, when the market tanks you get nervous and change your investments around. Often, this is the worst thing that you can do at the time you make your investment changes.

For years we've been working with our clients and what we call the bucket system. I think that it just might help you stay invested when you're inclined to pull your money at the worst possible time.

To learn more read on:

Start with opening three accounts.

Start by opening three accounts. One account will be cash, one account will be a fixed income account mostly with bonds and one account will be your equities account.

Too often I see people put all their investments in one account. If stocks go down by 20% there is a good chance the entire account will be down. This could make you nervous. Would you sleep better if only your stock account was down and the other two accounts weren't?

The whole purpose behind having three accounts is to help you realize all your money isn't disappearing at one time when there's a market correction.  If you only see one of your three accounts is down, I bet you would be able to stay calmer.  Our goal is to help you stay invested in a plan that you thought would work for you while your plan was being designed.

Know your tolerance for risk.

You need to know your tolerance for risk. And by risk, we mean how much the values of your accounts go up and down.

If you’re risk adverse, we might have you keep six years’ worth of money in cash and six years of money in bonds. That would give you 12 years to recover from any equity losses in the stock market. Isolating your investments in three buckets allows you to focus on which one is causing you pain.  And if you see that two out of three aren’t moving around much, you just might find yourself a little calmer than if everything is in one account.

Repeating ourselves……. our goal is to help you stay invested to get the long-term returns market has provided over the past 90 years. Now, this doesn't mean that has happened in the past is going to happen in the future. I do think that understanding and knowing probabilities and historic statistics can give you a leg up and help you hit your financial goals.  The bucket system allows you to look at each part of your portfolio in a rational manner.

In my lifetime there has only been 2 negative ten year periods.

If you look at rolling financial returns which means 10 year periods in the stock market there have only been two 10 year periods in my lifetime where there been negative returns. To see five and 10 year rolling returns click here.

If you look at historical numbers from 1929 to 2012 you'll see that there are only five periods out of 79 where the market went down. And in all five average return wasn't even a loss of 2% per year.

Bonds can lose money.

Some people want to know why we have such a large cash component in our planning. The reason is really pretty simple bonds also lose value just like stocks. Our goal is to keep you fully invested and if there is not a large cash component in your bucket system there is a good chance you're going to get nervous when we have a general recession. 

I doubt you want to be nervous and I certainly don’t want you to be.  Although cash is boring, it’s also safe……to a point.

It’s all about rebalancing for safety.

The key to the system is what we call *rebalancing. When we rebalance we move money from one bucket to another. If stocks are up for the year we take money out of your stock account and put into the cash account. If stocks are down for the year we leave that account alone and look at the bond account. If the bond account is up we take money from the bond account and move it into the cash account. Finally, if both the bond and stock account are down we leave both where they are and spend the cash account as needed.

The purpose behind the strategy is to only take money out of accounts when they’re up in value. Over the years this system is worked very well for me and I suspect it would help you sleep better at night.

So what you think, why don't you click here and tell me your thoughts about how a bucket system might help you are not.

  

* Rebalancing assets can have tax consequences.  If you sell assets in a taxable account you may have to pay tax on any gain resulting from the sale.  Please consult your tax advisor.

 The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC.  This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.

 

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Topics: bucket system, investment management, Investments

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