The buckets strategy segments your portfolio into three time-horizon buckets:
Covers 3 to 5 years of non-discretionary living expenses. Held strictly in cash, cash equivalents, short-term CDs, or Treasury bills to ensure total stability.
Covers expenses for years 6 through 10. Invested in high-quality corporate bonds, municipal bonds, and dividend-paying stocks to generate income and modest growth.
Invested for aggressive growth in U.S. and international equities to combat long-term inflation.
While behaviorally comforting—knowing your short-term spending is safe from a stock market crash—the buckets strategy is often an asset-location nightmare. Standard portfolio reporting software cannot track it easily, and rebalancing across buckets without triggering unnecessary capital gains taxes is highly complex. In reality, it is simply a psychological wrapper around a standard diversified portfolio; a cash-cushion strategy achieves the same outcome with far less friction.