With increasing inflation and interest rates and a war in Ukraine, there is a lot of stress investing in today’s bear market and it can be difficult to navigate. One strategy that may increase confidence about staying in the market is the bucket strategy.
With the bucket strategy, you divide your investments into three different accounts as follows:
- Cash Reserve account – funds are kept in a checking or savings account and cover living expenses for the next 12-month period.
- Income account – funds are invested in short-term bonds and cover expenses for year 2 and year 3.
- Growth account – funds are invested in a diversified portfolio composed mostly of stock investments and cover long-term (longer than 3 years) needs/goals.
Historically, bear markets (when a market experiences prolonged price declines) can last from six months to three years, on average1. By protecting the immediate and short-term financial needs from today’s market volatility, your remaining assets have time to recover from any dips in the market. This gives you the ability to stay in the market without feeling the urge to go to cash or to gamble with market timing.
With a bucket strategy, you could experience the following benefits:
- Low volatility– because a portion of your portfolio is invested in cash and bond investments, your overall risk is minimized.
- Growth portfolio appreciates over time –By staying in the market, your investment can potentially grow uninterrupted over time.
- Provides you the ability to stay invested– when markets are volatile, it is difficult to stay invested. Knowing your short-term needs are covered, your long-term investments have time to weather market volatility.
- Feel confident that you may realize your goals– By staying in the market, history shows your investments may grow, moving you closer toward your financial goals.
With the bucket strategy, you have the ability to potentially grow your investments while having the increased confidence that your short-term needs are met. In today’s market, the bucket strategy can serve as a good solution to withstand crises while still pursuing your long-term goals.
1”How Long Could It Take Your Portfolio to Recover From the Bear Market”, Carter Kilmann. January 19, 2022. https://medium.com/bacon-bits/how-long-it-could-take-your-portfolio-to-recover-from-the-next-bear-market-3b736356d18c
Investing carries an inherent element of risk, and it is possible to lose principal and interest when investing in securities. Past performance is not indicative of future results.