Bucketing vs. Fixed Asset Allocation: Growth Investing vs. Value Investing

An interesting feature of the bucket approach is that it can cater to the emotional needs of retirees at different points in a portfolio's journey.

Consider what happens when the market falls. A bucketeer would generally draw from the safety bucket first, allowing the depleted equity portfolio time to recover before relying on it for near-term expenses. In this respect, bucketing has an interesting parallel with fixed asset allocation (FAA). An FAA practitioner also avoids selling equities after a decline—instead, they may sell bonds to rebalance toward the target asset allocation.

The more interesting comparison, however, appears when the market is going gangbusters.

Suppose a retiree has seven years of future expenses in the safety bucket. As the equity portfolio rises, the amount allocated to the safety bucket does not necessarily rise with it. The safety bucket remains at the level required by the retiree's spending needs, while the excess wealth accumulates in the growth bucket.

This allows the equity allocation to become increasingly large without jeopardizing the retiree's near-term security, because enough money has already been set aside in the safety bucket.

There is an interesting parallel here with growth investing. A growth investor doesn't necessarily reduce their exposure simply because valuations have risen. If the investment continues to perform well, they may be comfortable allowing the position to become a larger part of the portfolio.

FAA takes the opposite approach. As equities rise, the equity allocation becomes larger than its target, so the FAA practitioner sells equities and adds to bonds to restore the original allocation.

There is nothing inherently wrong with this. Maintaining a fixed allocation provides valuable discipline. But for a retiree who is already comfortably funded and has more than enough in the debt portion, repeatedly selling a rising equity portfolio to maintain a fixed allocation may feel unnecessarily conservative.

This highlights an interesting distinction: bucketing has some characteristics of growth investing, while FAA has some characteristics of value investing.

Neither approach is inherently superior. They simply embody different philosophies about what to do when an investment portfolio is doing well.

For an overfunded retiree who is less concerned about running out of money and more interested in allowing wealth to compound, the bucket approach may have particular appeal.