Managing Inflation Risk with Buckets

A way to defend against high inflation is to start with lower protection in the bucket model and then increase protection as inflation risk declines. For instance, a portfolio could begin with just 3 years of expenses in the safety bucket, allowing more capital to be allocated elsewhere. This spare capital can be used to build a gold bucket or added to equities, both of which can help protect against high inflation.

As inflation risk subsides, the safety bucket can be gradually increased to 5 or more years of expenses, improving stability. At the same time, the gold bucket can be phased out, since its role as an inflation hedge becomes less critical.