Lynda Powell from Wedgewood Brokers shares an interesting article by PorfolioMetrix



Bucket strategies are an alluring alternative for financial advisers building drawdown portfolios in retirement. Generally, end clients find the strategy understandable, it can be relatively easy to implement and it plays into a well-known behavioural bias known as mental accounting (1). This makes discussions between an adviser and the investor easier and can assist the investor in staying the course during difficult periods. Managing expectations and client composure is a very important component of the value add a financial adviser can offer. However, is there a trade-off for the psychologically appealing bucket strategy?



Bucket strategies provide a great framework for advisers to explain to clients why they have the investments that they have. Between the adviser and their client, a portfolio can be broken down into any number of objectives which are then bucketed and provided for specifically. In a simplistic world a typical bucket strategy would comprise of short-term, medium-term and long-term spending needs. As you move from short- to long-term, so your asset allocation adjusts from low risk to high risk (2) :

“Securing” short term spending needs through low risk cash instruments is appealing to most investors during volatile markets. The strategy entails leaving the longer term buckets alone and topping up the short-term spending bucket as and when needed.


Complexity arises in deciding on the methodology used to implement the bucket strategy. A few of the decisions that need to be made are as follows:

  • Number of buckets
  • Bucket objectives (this includes establishing the number of years of withdrawals to be sustained by each bucket)
  • Investment strategy per bucket
  • Top up methodology; and
  • Managing the proportion of buckets in the overall strategy



The overwhelming strength of the bucket strategy is the behavioural benefit and the ease with which a less sophisticated investor understands it. Bucketing objectives and the asset classes required to meet those objectives gives a fantastic framework for adviser to tell a story about why each bucket is invested the way it is. The fact that the strategy appeals to an established and documented heuristic known as mental accounting makes it more powerful.




This is illustrated by means of an easy example with the following inputs:


For simplicity we have assumed no inflation and have only made use of expected excess returns for a conservative bucket and a growth bucket. We fill the conservative bucket with three years’ worth of income and top it up when the bucket can no longer sustain the income (at the end of every third year). Using a simplified straight-line projection (no volatility) we illustrate how the allocation to growth assets varies over 30 years in relation to a portfolio that is rebalanced (3) to the starting allocation every year:

Growth % Allocation Over Time


The above illustrates the inconsistency of asset allocation to the growth bucket over time. As the conservative bucket depletes, the allocation to the growth bucket rises, “up-risking” the overall portfolio. This is then brought back into the target range when the conservative bucket is topped up. The above results in timing risk as the proportional weights of the buckets change  throughout the life of the portfolio.

Another way of illustrating this is by charting the  rolling  average  allocation  to  growth  assets for both strategies. This is higher for the bucket strategy than the normal rebalance strategy for most of the 30 year period. Only after approximately 26 years does the average allocation to growth assets match. However, at that stage the actual allocation to growth in the  bucket  strategy  is  around  50%  because the growth bucket has been depleted to maintain the conservative bucket:



A bucket strategy involves a waterfall effect in cash flows between buckets and ultimately to the investor. The higher risk bucket tops up the lower risk bucket which in turn pays out cash to the investor.

In  a  strict  bucketing  strategy  rebalancing  does  not  occur  in  the  other  direction  to  the   waterfall.  Introducing  real  world  risk  into  the   equation   means   that   a   bucket   strategy   will not use conservative assets to  replenish  the  growth  bucket  when  risk  assets  underperform.  “Time” is the rebalancing strategy within a bucket approach which results in the investor foregoing  the “rebalance premium” in risk assets. The bucket strategy therefore avoids selling underperforming assets in times of stress, but it also does not buy assets that have gone down in price. Losing the discipline of selling high and buying low (rebalanced strategy) introduces a long term drag on performance for bucket strategies.



The conservative bucket gets a lot of focus, but longevity risk is largely countered by the growth bucket. Positive real returns are necessary to fight the effects of inflation over long periods of time. A client that completes a Financial Personality Assessment (FPA) may only have the willingness  to accept a certain amount of risk. If a bucket strategy were to be followed the conservative bucket will need to be compensated for with a higher risked growth bucket. This may not be palatable for the client given that, by definition, the growth bucket will be experienced by the investor in isolation. Should the up-risking of the growth bucket not occur, the investor will be structurally under-risked.


Of the studies we found on the matter (4), the overwhelming  evidence  was  that  bucket strategies were inferior to standard rebalanced strategies on several metrics. Generally, bucket strategies underperformed more severely for longer time periods and required higher withdrawals. Both were directly related to the cash drag implied by the bucket strategy as equity and bond allocations are substituted for cash.



One of the major underpinnings of the bucket strategy is that during a market fall equity instruments are not sold to pay income. This results in lower sequencing risk relative to a rebalanced strategy. However, in our opinion, this is not the case and can be illustrated in the example below.

An investor with R100 requires R5 income and invests half in equity and half in bonds. Equities fall by 50% in the year and the income is withdrawn proportionally. However, the portfolio is subsequently rebalanced selling bonds to buy equity and re-aligning the portfolio to its strategic asset allocation.


The result is the investor buys far more equities through the rebalancing process than what they sold to  fund  the  income.  This  mitigates  the  sequencing  risk   problem   and   more   effectively   captures the “rebalance premium” which adds material value to portfolios over time (5).



PortfolioMetrix believe that long-term strategic asset allocations  drive  long  term  expected  risks  and returns. Asset allocation needs to be viewed holistically to increase the probability of success for clients. The evidence suggests that bucket strategies are inferior drawdown strategies relative to standard rebalanced portfolios that are  appropriately  risked.  Given  this  we  are  not  of  the  opinion that the psychological appeal warrants the use of a suboptimal drawdown strategy.


There is always risk in blanket diagnosing anything. Generally, end  investors  find  the  bucket  strategy more understandable which may help them ride out volatility more effectively than  otherwise. A marriage of the two strategies may be the answer to increasing success rates for retirees. The only way to do this is to improve the  framing  of  the  rebalance  strategy  to  clients  in  initial and  ongoing meetings. It is entirely possible to use the same “language” used in bucket strategies to explain and report on a rebalance strategy.

3.1.1 An Example

Consider the example used on page 2 to illustrate a very simple bucket strategy:

According to WealthExplorer™ the above portfolio (using only SA asset classes) is expected to generate a return of slightly above CPI + 6%. We compare the asset allocations of the above bucket strategy to a standard portfolio constructed in WealthExplorer™ with a similar expected return. The asset allocation differences are shown below: 

 Note: Onshore and Offshore asset classes were combined in the PMX portfolio for simplicity

* the property allocation for the bucket strategy was assumed to be 3% of the overall equity amount

The asset allocations of the two portfolios happen to be very similar. So, what is the difference between these two strategies? It comes down to the consistency of implementation of the asset allocation, rebalancing methodologies, and the way in which the strategy is presented and explained. It is the latter point that can be improved on when talking to clients about a standard rebalanced strategy. The cash and bond allocations (Income assets) are used in both strategies as portfolio stabilisers and to protect the safety of income in the short and medium term. Equity and growth assets are also present in both portfolios to protect clients against the long term destruction of inflation.




We acknowledge the psychological benefits of a bucket strategy and the potential improvement of investor anxiety in volatile periods. However, the strategy is inefficient over the longer term in comparison to rebalanced strategies. We would prefer a solution that is fundamentally sound and that can appeal to clients from a psychological perspective and is easily understood. To do this we would prefer a marriage of the two strategies whereby portfolios are run as rebalanced strategies but presented and reported on in a similar fashion to bucket strategies.



(1)  According to the theory of mental accounting, people treat money differently, depending on factors such as the money’s origin and intended use, rather than thinking of it in terms of the “bottom line” as in formal accounting (Thaler, 1999).

(2) This is a hypothetical example for means of illustration

(3) We created the rebalance strategy by using the same starting asset allocation as the bucket strategy and rebalanced annually

(4) See appendix for detail





“The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?” – Javier Estrada

“Sustainable Withdrawal Rates from Retirement Portfolios: The Historical Evidence on Buffer Zone Strategies” – Walter Woerheide and David Nanigian


5.2.   ARTICLES…-Unless-Youre-A-Good-Market-Timer/