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Does Your Portfolio Spark Joy?

As with decluttering your home, winnowing down your number of accounts and the holdings within them can be incredibly clarifying

Christine Benz 25 March, 2019 | 11:59AM

Marie Kondo

Inspired by organising consultant Marie Kondo's Netflix show and best-selling book, "The Life-Changing Magic of Tidying Up," everyone, it seems, is getting rid of possessions that no longer “spark joy”.

Should your portfolio be next on your "To-Kondo" list? I'd say emphatically, yes. As with decluttering your home, winnowing down your number of accounts – and the holdings within them – can be incredibly clarifying. With fewer accounts and holdings, you can better focus on the really big determinants of your financial success: your asset allocation, your savings or spending rate, and your proximity to reaching your goals. You won't risk getting bogged down by assessing your portfolio's value/growth exposure or paying attention to media reports on shares that you own.

And just as a streamlined household is easier to clean, streamlining your portfolio makes it simpler to oversee it on an ongoing basis. Of course, no portfolio truly runs itself. That's especially true in retirement, when you're necessarily trying to figure out how to extract some of your living expenses from your investments.

But if you stick with very basic investment building blocks for your portfolio, it will be simple to view and adjust your portfolio's asset allocation. You'll also be able to readily determine how you'll refill your cash bucket on an ongoing basis. A bucket portfolio strategy was pioneered by financial planning guru Harold Evensky: the basic premise is that assets needed to fund near-term living expenses ought to remain in cash, despite the tiny interest rates. Assets that won't be needed for several years or more can be parked in a diversified pool of long-term holdings, with the cash buffer providing the peace of mind to ride out periodic downturns in the long-term portfolio.

Focus on Living Expenses

Setting liquid assets aside to meet near-term living expenses is the focus of the Bucket approach to retirement portfolio management. The principle is that the long-term investments – bond and equity holdings in Buckets 2 and 3, respectively – in the portfolio can and will move up, down, and sideways. But if a retiree knows that she has enough cash set aside in Bucket 1 to match living expenses that are coming right up, she can make peace with those gyrations.

I also like that a Bucket approach can make it easy to visualise how much to allocate to each asset class based on expected portfolio withdrawals; it takes asset allocation from the theoretical to the practical. Withdrawals for the next couple of years go in cash, to help ensure money never has to be plucked from bonds or shares at a low ebb; withdrawals for the next eight or so years go in bonds; and the rest of the assets go into the stock market. That way, in a worst-case scenario in which a calamitous bear market for stocks presents itself and lingers, a retiree would have a bulwark of roughly 10 years' worth of withdrawals in cash and bonds to "spend through" before touching the equity holdings.

By using portfolio withdrawals as the starting point, retirees can readily "rightsize" their allocations to each of the asset classes. My hope is that retirees will think through their own situations and planned withdrawals when allocating to each of the buckets.

"Bucket maintenance" is another important aspect of implementing a Bucket strategy for your retirement portfolio. Bucket 1 is there for spending, but it will eventually need to be refilled. How best to do it? For all but extremely frugal retirees, relying exclusively on income distributions won't cut it. Instead, Bucket-oriented retirees will need to employ rebalancing as a component of their cash flow strategies. Because rebalancing opportunities won't come up each and every year that accentuates the value of holding two years' worth of living expenses in Bucket 1.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.

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