Investing Basics

Defining Success and Bucketizing Your Investments

Most investors share a common investment goal: To make more money. In order to successfully do so, it’s important that investors have a clear understanding of what “success” means to them. The definition of “success” can vary between individuals, based on their stage of life, their responsibilities, and their interests. Success in investing is therefore contingent on setting specific goals, and then accounting for the unique variables that will impact their attainment.

Clearly conveying these investment goals to a financial advisor empowers the advisor to offer suitable guidance. It also gives the investor greater confidence in the advisor’s ability to do so. In short, to be effective, investors must first define success for themselves before asking an advisor for assistance.

Setting Realistic Investment Goals

Goals must be concrete, not nebulous; knowing which goals the investor is saving for should determine the investment strategy. For example, a children’s college fund built over 18 years will be managed differently from a property down payment financed over the next two. The total cost of the goal, the initial investment, the time required to achieve it, and the impact of interest and inflation over time are important factors to consider.

When setting goals, investors must realistically evaluate their present income and possible future earnings, their total wealth including non-portfolio assets, their necessary expenditures and spending habits (current and desired), their age and family situation, and their overall risk tolerance. During scenario-building, it’s a smart precaution to account for health complications for one or both spouses or a number of parents.

Honest self-reflection is also necessary, as investors’ emotions, thought patterns, behavioral tendencies, biases, and personality traits impact their investment decisions. Changes in personal circumstance or emotional outlook can spark rash decisions that ultimately interfere with an investor's goals. Proper planning can help mitigate these by shoring up his or her self-discipline.

Bucketizing for the Future

Common investment goals follow a similar theme: preparing for the future. These can include purchasing a new property, setting aside college funds and inheritances, enjoying travel or leisure activities, supporting ailing family members, and saving for retirement. To plan for these goals, the investment strategy must account for fluctuations in the stock market and global economy.

One strategy is the Bucket Approach. Conceived by the lauded financial planner Harold Evensky, bucketizing divides the investor’s assets across two or more "buckets." One bucket provides for immediate cash-flow needs for a period of two or three years, while other buckets maintain a diversified portfolio of stocks and bonds.

Each bucket is set up to pursue a separate goal, and is managed and rebalanced accordingly. The cash bucket seeks to guard against the investor's current livelihood from short-term market volatility, allowing investors to act with less worry and greater clarity when managing their portfolios. The other buckets employ a range of conservative, moderate, or aggressive investments with varying levels of liquidity based on the time horizon and returns needed to achieve the goals.

One Bucket, One Goal

Imagine an investor who wants to make a down payment on a new home within two years, as well as save for a child’s college fund. The home is important to this investor, so he or she can't afford to lose any of the initial investment. This calls for a conservative approach, such as setting up a bucket of short-term holdings. Meanwhile, the investor has $5,000 for the college fund bucket and 18 years to grow it to $200,000. For this bucket, he or she can take a more aggressive approach, investing in a few select growing companies with the hope of seeing high returns.

The Bucket Approach creates an invaluable roadmap. It charts where an investor's assets are committed, where progress is being made, and where advisors should focus their guidance. The specificity and comprehensiveness of the approach, however, is a direct reflection of the initial goals set by the investor. Clearly defining success makes it easier to strategize – and therefore to helps aim for success.

Please note that the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, and as such:

  • No strategy ensures success or protects against a loss.
  • Stock investing involves risk including potential loss of principal.
  • Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
  • There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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