IFSR Bucket Investing

Transcription

1 IFSR Bucket Investing Rajeev A. Vaidya Disclaimer in plain language: Opinions are like noses, everyone has one! You are going to see mine today!! I am simply sharing my perspective. This is not investment advice or recommendation. Form your own opinion, make your own decisions. 3/1/2019 Rajeev Vaidya OLLI 1

2 This week s Class Discussion State of the Markets Topic of the week Bucket Investing What are Buckets? How are they used in a portfolio? Buckets for time horizons Buckets for investment strategies March 19 Rajeev Vaidya OLLI 2

3 Discussion State of the Markets Standard Monthly Charts Conference Board LEI Core inflation no change from last week Dick s pictures Recessions and bear markets Correlations stocks and bonds Standard Weekly Chart S&P 500 3/1/2019 3

4 Monthly Standard Chart # 2 3/1/2019 4

5 3/1/ Dick Arvedlund - OLLI

6 3/1/ Dick Arvedlund - OLLI

7 S&P500 Weekly Standard Chart # 1 10/16 11/7 12/3 2/25 10/ Market close on 2/26 is up 4.48% since start of 2018 March 19 7 Rajeev Vaidya OLLI

8 Topic of the week Bucket Investing What are Buckets? How are they used in a portfolio? Buckets for time horizons Buckets for investment strategies March 19 Rajeev Vaidya OLLI 8

9 Risk vs. time horizon Hold Count Average Stdev Worst Best Losses % % % % 3/1/2019 9

10 Income in a low yield market 3/1/

11 Realities of investment Risk and return go hand in hand. The longer the time horizon for an investment the more managed risk you can take. Till interest rates go substantially higher, producing returns form risk free bonds is a challenge. Overall market yield is less than 10 year t-bill There are individual stocks that yield higher 3/1/

12 What are buckets? This Photo by Unknown Author is licensed under CC BY-SA This Photo by Unknown Author is licensed under CC BY-SA This Photo by Unknown Author is licensed under CC BY-SA Portions of your investment portfolio Distinct from other portions based on Investment objectives/goals Investment strategy/style 3/1/

13 Three bucket approach Pioneer Harold Evensky, Money manager in Florida. Good resource of information - Christine Benz, Morningstar Bucket 3 long term investing to grow the portfolio. Draw down to refill Bucket 2 periodically Bucket 2 shorter term investing. Enough to draw down to refill Bucket 1 for the next few years Bucket 1 draw out money for near term expenses 3/1/

14 Buckets Tax-managed accounts Risk to Principal Taxable accounts shortest Protection of principal is primary goal Smallest size minimizes lowering of return for portfolio Size of buckets depends on each individuals situation Goal is to have an allocation strategy that sizes risk correctly for each persons situation Time horizon for investment strategy Maximizing after tax growth is primary goal Long time horizon minimizes risk to principal longest Return 3/1/

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16 Benefits of 3 bucket approach AAII study April Alternative to a bucket strategy is one investment portfolio with systematic withdrawals. Main benefits of a bucket approach are psychological Security for near term needs Bucket 1 and 2. Increased tolerance for risk in Bucket 3. Easier to understand - each bucket has a strategy consistent with the investment horizon and goal. 3/1/

17 Bucket approach recent articles Comparing bucket vs. withdrawal strategies AAII study April Investopedia article April AAII Article Christine Benz details of executing a 3 bucket strategy. July MorningStar Christine Benz ETFs for Bucket Strategies Jan Bucket Strategy misconceptions May /1/

18 Bucket 1 near term needs How big? Assess your living expenses for 1 year Subtract out non portfolio sources of income pensions, SS payments, wages from employment etc. Balance is base amount needed in Bucket 1 for 1 year. Add in emergency reserve fund HC needs, home/car repairs etc. Bucket 1 is the lowest risk and lowest return portion of your portfolio. Do you need a Bucket 1? 3/1/

19 Bucket 1 - strategies Spend less, save more Earn more Supplement your income with part time work Use cash back credit cards and harvest the cash. Income from your stock / ETF holdings in Bucket 2. Dividends Covered Options Earn the best return on Bucket 1 money Hold some portion in cash Hold the rest in short term investments with low risk to principal. 3/1/

20 Spend Less Ideally pay of debt before retirement - No credit card debt Longer use of high expenditure items Cars etc. Careful about travel and vacations In state college for kids Assemble list of experts for household work Do your own yard work Smart shopping Avoid harmful habits Gambling Vices Success is a state of mind 3/1/ Fred Cash - OLLI

21 Bucket 1 investing strategies Cash CDs Bankrate.com latest rates MMAs / High Yield savings accounts American Express, Goldman Sachs many others Yielding from 1.8% to 2.1% APY Limited transactions per month Ultrashort term bond funds MINT, VFSTX, BSV, JPST, ISTB, HSRT Options trading Passive Active Increasing Risk Increasing Engagement / Effort 3/1/

22 Bucket 2 How big? Few years of money needed to refill Bucket 1 Subtract out emergency reserve fund from Bucket 1 amount. This does not need to be refilled till it is used. Shorter term investment strategies Income production Focus on stability - moderate, managed risk Bonds Dividend focused investments 3/1/

23 Bucket 3 How big? The rest of the portfolio not in Buckets 1 and 2 Longer term investment strategies Goal is to maximize after tax return Take more measured managed risk than Bucket 2. Equities High Yield Bonds etc. 3/1/

24 What are buckets? This Photo by Unknown Author is licensed under CC BY-SA This Photo by Unknown Author is licensed under CC BY-SA This Photo by Unknown Author is licensed under CC BY-SA Portions of your investment portfolio Distinct from other portions based on Investment objectives/goals Investment strategy/style 3/1/

25 Buckets - Investment strategy / style Different investment strategies and styles require different engagement rules and plans for success. These strategies can be used mainly in Bucket 3 and some in Bucket 2. Different ways to participate in the equities market. Passive, indexed ETF based investing Investing in individual equities Value investing Growth / Momentum investing Dividend investing Derivatives based investing Options / Futures Different ways to participate in the bond market. Bond fund / ETF based investing Individual bonds / ladders. One class devoted to this Several classes devoted to this One class devoted to this 3/1/

26 Next Class Fixed Income Markets & Ideas Bonds Bond basics Concepts, terminology Bond Risks Individual Bonds Bonds Funds and ETFs 3/1/

27 Happy Investing!! Thanks!! Web page My 3/1/2019 Rajeev Vaidya OLLI 27

28 Review - Investing in Retirement Prior to retirement Accumulation phase After retirement Protect and grow the investment portfolio Use the portfolio to produce income for current expenses Draw down the principal as needed and in a way that does not exhaust it prematurely. Sequence of return risk is relevant Producing income from portfolio is relevant Two broad approaches 1. Set asset allocation strategy for overall portfolio. Make systematic withdrawals from portfolio 2. Bucket Approach March 19 Rajeev Vaidya 28

29 Buckets - Investment strategy / style Different investment strategies and styles require different engagement rules and plans for success. These strategies can be used mainly in Bucket 3 and some in Bucket 2. Different ways to participate in the equities market. Passive, indexed ETF based investing Investing in individual equities Value investing Growth / Momentum investing Dividend investing Derivatives based investing Options / Futures Different ways to participate in the bond market. Bond fund / ETF based investing Individual bonds / ladders. 3/1/