This is the most elegant explanation of prudent investment management I’ve ever heard, and it came from Steve Adell. It’s called “The Bucket List”.
The idea is to categorize your investment money into three simple buckets which are based on intended use: Cash, Fixed Income, and Growth. You fill the buckets in order.
Bucket #1: Cash and Cash Reserves:
This bucket has your set aside cash for rainy days and unanticipated expenses. A good standard rule of thumb is this bucket should have roughly six months of living expenses in it.
Bucket #2: Fixed Income Bucket:
If you are not in yet need of income from your investments, this bucket is much smaller than one who is nearing retirement. This bucket of money is invested in income oriented securities, such as bonds, “bond-surrogates”, and other high quality, high yield instruments. This bucket should be able to produce anywhere from 4-8 years of living expenses without depleting principal.
Bucket #3: Growth Bucket:
If you do not yet need income from your investments, this bucket is designed for growth with a portfolio of high quality stocks that produce a desirable growth trajectory with tolerable risk management as you near retirement. As you get about five years out from retirement, you start reallocating growth bucket moneys to fixed income. The beauty of this is that you can enjoy the volatility of the preceding five years to make well strategized sells of growth securities and purchases of fixed income securities. After the 4+ year goal is met for the Fixed Income bucket, the Fixed Income is continually replenished from the Growth bucket to stretch out the years of set aside anticipated living expenses.
Pretty simple concept, right?
Let us know if we can help.