Ep #114: Call it What it Is! Redefining Your Investment Buckets

Benjamin Haas | Mar 26, 2024

Listen on Spotify:

Watch the Full Video on YouTube:

Full Transcript:

00:00:04 Benjamin Haas:

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Hi, Adam. Welcome back. Podcast number, putting you on the spot. Do you know what number this one is?

00:00:36 Adam Werner:

You know that I don't.

00:00:37 Benjamin Haas:

Me neither, but for everybody out there, it's in the title, I'm sure.

00:00:44 Adam Werner:

Hundred and something.

00:00:45 Benjamin Haas:

Yes. I know I usually say this, but I'm excited about this topic today because as you and I go through the evolution of communicating with people over time, I think sometimes we put ourselves in the spot where like, man, are we speaking the same language as our clients? Like we get stuck in financial jargon. You know, these are things that we deal with on a day to day basis. So we think short term bucket means something, but to somebody else that may mean something completely different. So. Let's go through today. I think we're going to call this redefining one of our core concepts of investing: our three bucket theory for the purpose of making sure that people really understand what we're talking about.

00:01:32 Adam Werner:

Yes. So I think the important part is to your point, I know I'm guilty of this frequently because we live it, we breathe it, we interact with this all day long. The terminology just becomes secondhand, but then talking to a client who doesn't necessarily interact with it or have the depth or even want to go to that depth of knowledge, let's just meet them where they're at so that these concepts can move beyond just the conceptual and actually get put into practice because we know that the rubber has to meet the road. Implementation, getting things put in the right spots, moving forward, getting things done, is ultimately the name of the game. So now it's just trying to connect these two sides so that someone has a really good idea of what we mean when we say the short term bucket and that's going to mean different things to different people.

00:02:32 Benjamin Haas:

Especially when there are times of angst or we're in this spot where it sounds so simple. We've gone through financial planning to say, here's what we think you need over what period of time, here's how we're going to invest it, but then they're going to open up their statement. They're going to go to the online portal and I think being able to connect the dots between what that concept was and where your money is in these different accounts at these different times, it's just going to help. It's not only going to help with our communication, with their understanding, but I really hope it helps at a time when there's flux in their life, to really see how they're doing in what bucket to be able to hopefully at all times feel okay. Good times or in bad.

00:03:18 Adam Werner:

Yeah, and so ultimately I think some of it comes down to just the mental accounting. And I know we do that not only with clients, but I know I do it in my personal life, this money is for this purpose. And I think a lot of clients do the same thing. So a lot of this concept of the three buckets is just trying to align those mental accounting buckets and we'll give some examples of maybe how clients have built in their own terminology. We've kind of now used that just because it makes that conversation so much easier when we are speaking the same language and we're referring to whatever that is, the same way, it just makes it very easy to connect those dots.

00:04:02 Benjamin Haas:

So very broadly, we really talk about three buckets in investment in financial planning. This is where those two things come together. Short term bucket, medium term bucket, long term bucket and that's how we've kind of titled it. If you go to our website, if you're not familiar with our three bucket theory, if you're a client, I really hope you are. On our website, in our graphics, wherever you will find it, we list them as short term, medium term, long term. So, let's go through each bucket. Let's define what we really mean by these titles and then how we can do a better job putting into practice for them the concept of it to how we're going to refer to it, like you said, in their words, if we can get to that spot.

00:04:43 Adam Werner:

Yeah. Alright, so let's go. Short term bucket? High level? Short term bucket: one to two years worth of spending need. We'll say it's in retirement, but doesn't really matter, short term is short term, but for us, that's one to two years. So in our minds that is money that should not be exposed to really any risk, that should be as safe as safe can be; think money market accounts, CDs, just savings at the bank. Anywhere that you can put money that you're not going to lose or you're not at risk at losing, it needs to be safe. That's your safety net because we know you're going to spend it or at least the plan is for you to spend that money over the next year or two, and we don't want to put that in a spot where it's at the whims of the market at any point in time.

00:05:37 Benjamin Haas:

So if we were to redefine it as not just short term it could be defined as helping you avoid the oh, crap. Look how bad the market is bucket.

00:05:48 Adam Werner:

Yeah.

00:05:49 Benjamin Haas:

It's way too many words for a title, but that's that's what we hope it helps you avoid. Right? We know that wherever we're going to be in the next couple of years, markets go through cycles. We go through economic cycles. There will be a downturn in the market. Historically speaking, that could be sometimes they've been shorter in the recent history, but you know, 6, 9, 12, 18 months, that would be on the longer end historically speaking. So if you have cash in a bucket, one to two years worth of what you're spending, we hope that does help you avoid the angst that can come with, look how bad the markets are. You've got money in a safe spot.

00:06:32 Adam Werner:

Yeah, so I'll ask you. So someone you know, has given it its own name for this, for this short term bucket...

00:06:44 Benjamin Haas:

I think a lot of people usually do, whether it's couch money, whether it's mattress money, you know, coffee can money, freezer money, right? This is money that now you probably have it in an account. That's why you're maybe not as connected to it in the way you would if it was truly in a coffee can or truly in your couch, but it's the same exact concept, right? It is money that I know I have access to. I'm not going to lose it. That concept of shoving it in a coffee can is exactly the same point. This first bucket is supposed to be that. So you can call it that.

00:07:16 Adam Werner:

Yeah, call it whatever you want. I know we have clients like that's their cash on hand bucket, whether they actually spend it or not. That's mentally allocated for spending. So they know based on that bucket, how much is in there. It doesn't matter what the market's doing, as long as they have what they need or feel comfortable with in that short term safety spending bucket.

00:07:43 Benjamin Haas:

Now, sometimes the difficulty is, if you are the type of person that certainly is okay holding a lot of cash, you probably hold that at the bank. That's probably this first term, this short term bucket is, I would say not as frequently something that would be coming from us on an investment statement. We may hold some cash, that's always prudent on our end too. But if you're just pulling, I'm still just thinking, you pull out your statement, it's a bad time in the market. You're going, look how much money, it's going the wrong direction. Look at this drawdown. Look at what I'm losing. We don't want to lose sight of the cash that you have on hand that the plan has told you, you should have for the next one or two years and for some people, it's a lot more frankly.

00:08:30 Adam Werner:

Yeah, I know we've talked about that in different iterations, different podcasts, different pieces of content, but it is all customizable based on the situation. One to two is just the baseline for us, but it can certainly be different. So pivot to the second bucket, the medium term, or maybe it's the income bucket. I think, just to take a step back, the whole idea of the three bucket theory, this three bucket concept is ultimately a conveyor belt. Ending with that short term bucket being where you're actually spending from, this medium term, call this the three to seven years worth of spending need, its goal is to produce income so that it can help replenish. It's the conveyor belt, right? Push that forward into the short term bucket to fill some of that cash that you've already spent. It can fluctuate. There could be risk involved there, right? Think bonds, think dividend paying stocks, maybe certain types of annuities, things that are just paying you an interest rate or dividends just to own them. It's more passive income.

00:09:46 Benjamin Haas:

Yeah. I think the three to seven years is important to articulate. We're not just like willy nilly pulling numbers out here. If I was saying one to two years worth of spending in cash, that's because that would be hopefully the long end of a drawdown in the market. Three to seven years is usually the life cycle of their bear to bull, right? So without having to put too much risk at play, this is the bucket that we would absolutely hope and I think sometimes we see that this is the bucket that's kind of lost on people as they get closer to retirement. But the anxiety of retiring and knowing that your money's finite is because you feel like you're losing those paychecks coming to you on a bi-weekly, monthly, whatever it was for you. We want you to think of this medium term bucket. You called it income, think of that like your paycheck, right? Regardless of whether that value of it is going up or down, it is paying you and as long as it is paying you and we are passing that forward, then that is replenishing the cash. So I don't know your thoughts here on other ways that we could describe it that's maybe a little bit more tangible.

00:10:59 Adam Werner:

Well, you just kind of said it. We like to compare this bucket to somebody's house, right? Your house is fluctuating in value over time, but it really doesn't matter because that's not necessarily. If it's your primary residence, I think its sole purpose is shelter, right? Literally the roof over your head. It's great that the value is going up over time more often than not. Sometimes it can go the other direction, but ultimately its purpose is shelter. This bucket, similarly, its purpose is income. So your investments, however that's structured can fluctuate in value, but that's not necessarily its main purpose. So again, just comes down to the mental accounting. This is how I'm invested. I know it's going to fluctuate, but as long as it's paying me that income just to own it, that's the biggest important piece of that medium term, that income bucket, call it your golden goose. Those are your golden eggs that are being produced in that bucket that we're hoping just for owning this golden goose, it's going to spit out some eggs for me to eat in retirement.

00:12:13 Benjamin Haas:

Yeah, we're probably too far removed from that concept of you, had a bond and you're clipping the coupons and like handing in the coupon to get your paycheck. So yeah in today's world I don't know. This is a fair parallel, but you get your social security check, depending on your birthday the first, second, third week. You know if you worked for a company that pays you a pension. That's a consistent paycheck. It may not be that robotic. It may not be that consistent, but it's the same concept that regardless of the value of the bucket, that income stream is coming to you to help replace the paychecks that you were used to. So I liked the way that you called that. This is the roof over the head bucket, right? This is going to provide, pay the bills, hopefully on a consistent basis and over time, I think it's fair to say that this bucket should sustain some sort of value. It's not, we had a year of, bonds had a very bad year in 2022, but more often than not, this is going to be a more conservative bucket than the risk that will be associated in the last bucket that we'll talk about here or right now.

00:13:19 Adam Werner:

I was gonna say, I don't have anything else to say on the medium term bucket. So let’s pivot to the longterm. So the primary focus of this longterm bucket is growth. It is for your, we'll say riskier investments and again, risk is all relative. But if your short term is one to two years, the medium term is three to seven. We say the longterm is seven plus and I'll piggyback on what you said earlier. Why seven years plus, as you said, that a typical market cycle peak to trough back to peak is usually historically speaking, seven years. It hasn't necessarily played out to a tee in recent history, but I think it is still a really good guideline that at any point if you have enough of your spending set aside in bucket one: the short term, or bucket two: the medium term, or I should say and not or. In theory, you shouldn't have to worry about what your long term bucket is doing in any seven year period, giving yourself the time to ride out the eventual volatility, the pullbacks, the corrections that we will see regularly in the markets. The purpose again of this bucket is for that long term growth. It's really to try to keep up with inflation that social security may not be doing a great job of keeping up with inflation. If somebody has a pension, that doesn't have a cost of living adjustment, those dollars early on in retirement are not going to be the same dollars when you get to age 85, for example. If it's not inflating, you're not being able to buy as much, this is where you're hoping to at least try to keep up, grow your money, over time.

00:14:58 Benjamin Haas:

Yeah, I think the hard part about this bucket is if something is not going well in the market, like these are the assets that are going to be showing that this is money that you can lose and that's loses a snapshot in time, we would say over long periods of time. All we need out of this bucket doesn't have to win every year. Just needs to win and historically, the market goes up, right? We're at all time highs, even after a very tough 2022 year. Tough start to, you know, pandemic year of 2020. If it does its job, it's for the longterm. Any losses should hopefully be short term but that's why we have those front two buckets to give yourself the opportunity to wait out that period of time, not have to do anything. Maybe we're going to tell you to rebalance, but when you have gains, when there are those good years, we're not letting it ride. You take those gains, you pass them forward to an income bucket, which is taking the income and passing it forward to the cash bucket. Like you said, the conveyor belt. So I know it's a tough, this one's a tougher concept, I think because we are so sensitive to short term movements in the market and this bucket is what the news is talking about. When people say the market, the S&P, the Dow Jones, the NASDAQ, this is the bucket they're talking about.

00:16:15 Adam Werner:

Yeah, and it often creates the most like visceral feelings or reactions to headlines to seeing a statement. I'm sure thinking back to very beginning of COVID times when the market was down 30 percent in a three week period. This is the bucket that scares the crap out of people on a regular basis. Just because it's what people see. It's what people hear the most. When you think about investing, you think risk and not necessarily the cash or maybe more conservative income producing assets. It is this long term bucket that I think really impacts people emotionally. And psychologically, but that's where our hope is if you're able to structure things in a way to put things into perspective that this long term bucket, this growth engine that I need to invest in for my future self.

00:17:16 Benjamin Haas:

Future me money.

00:17:18 Adam Werner:

Yeah, and I made the joke earlier before we started recording, depending how old somebody is say they're 60 years old and they're looking forward to retirement, any money in that long term bucket, that's for 70 year old me. I'm not going to touch this for at least the next seven years, assuming all my plan is set up in a way that allows this last bucket to just do its thing over time. And to your point, it's not the S&P stocks are not going to always go up. We know that history has taught us that over and over again. But more often than not, time is your friend in this bucket. So that's where setting up your first two buckets to give yourself time to just let things go on the stock side, over time, usually you're rewarded for that.

00:18:11 Benjamin Haas:

Yeah and what's kind of popping into my head right now, Adam. I think when people get to retirement and where the three bucket theory is something that we would focus on being like, here's how you're going to run your retirement portfolio. I think people, like how they behaved while they were saving needs to be vastly different when now they have a finite pool of resources, right? I need to invest differently. I need to review this. I don't want to see short term losses because this is all I have. I would encourage people to just tap into that saver mentality, right? What got you all this money that you can now place in these buckets? It was the mindset at 30, 40, 50 year old, whenever you could start saving that this is future me money. I can set this aside. I'm not going to worry about what it does this year because this is for my retirement. This growth bucket is that same concept, just because you retired at 62, 65, whenever it is. This is money for much later in life. We can't just put everything in cash. It won't keep up with inflation. We can't just put everything in that income bucket, it may not keep up with health care expenses. You need to have this and we would encourage you to have that same mindset. This is your savings for the future. This is future me money. I don't have a better name for it.

00:19:26 Adam Werner:

This is a tough one. I'm thinking about a specific client. I think it's one of the harder thoughts, to kind of work through because, as you said, when people get to retirement or approaching retirement, the natural inclination is, well, I've taken risk and I've invested and accumulated these assets to get to retirement, and now's the time when I'm going to start to use them. So I need to put everything in a safe spot. But, more often than not, we're hoping for many people, they're going to have a long retirement runway that putting everything in a safe spot on day one of retirement doesn't always make the most sense. I shouldn't say doesn't always, it rarely, if ever, makes the most sense because there are so many other variables in retirement that can throw you a curveball and you're going to want to be able to have some growth. Have access, keep up with inflation as we said, just build a long term care bucket if you need to if you're not buying insurance. Just other things that you want to account for in retirement. I'll go back to, I have a client in mind who always pushes back, he's in his early seventies, always pushes back on, the concept of, well, the longer we can keep this invested, right. Don't kill any golden geese that are laying your golden golden eggs, the better off you'll be in the long run. But the answer or the pushback is always, yeah, but I don't know. Long is all relative to me. I only have a few years. So like long term, I can't even think long term because I'm only looking at what's in front of me just to get through the short term. But point being, we don't know what our future holds. The whole point of saving for retirement, as you said, is to give yourself that cushion, to give yourself that future flexibility because we don't know what we're going to need, when we're going to need it. We're all just making these assumptions and planning in today's world for tomorrow and having that growth bucket, this long term bucket gives you a better opportunity for flexibility in the future if and when it's needed.

00:21:35 Benjamin Haas:

So then I'd wrap it up by probably saying this. This concept of three buckets is kind of the framework for everybody that we work with. Now, what you have in each bucket may be relative to how you view investment risk, how you plan to spend and what you need at what given time, but I think this works for everybody, which is why we would say the call to action if we're working together is call these buckets what you will what's going to work for you, you know? We can even nickname your accounts as we need to on the website on your statements.

00:22:10 Adam Werner:

Yeah.

00:22:10 Benjamin Haas:

However, you can now take this concept and be able to visualize it as you view your money. We'll do it. We'll make it work.

00:22:18 Adam Werner:

Yeah So, one last thing to share. We have a client who has multiple accounts and again, it just comes back to mental accounting. This part of their retirement account is their legacy account. It is there. They own it. They can use it during their lifetime, but mentally that is bucketed. I'm hoping never to touch this and this is for the grandkids. So something just as simple as, this is the legacy bucket within my growth bucket. Just being able to share that terminology and think in the same wavelength as the client really, I think, makes any decision on investments or spending in retirement. It just makes it that much easier that we're all on the same page, thinking about it in the same way. So to your point, challenge to clients or to anybody that we work with. Think about it. Think about how you would view these different buckets, short term, medium term and long term, and try to think of what terms or terminology you would want to use that just feels more natural for how you view it and let us know. I'd be very curious to see how many different variations people come up with, cause it is very interesting to me. A lot of it is just psychological. How do people think about the purpose of their money?

00:23:43 Benjamin Haas:

Love it. Awesome way to wrap it up. Thank you for your help. Have a wonderful rest of your day!

00:23:51 Adam Werner:

You too.

00:23:52 Benjamin Haas:

I'll catch you next time.

00:23:56 Adam Werner:

See ya.

00:24:00 Benjamin Haas:

Hey, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual to determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.

Tracking # T007077

Ep #114: Call it What it Is! Redefining Your Investment Buckets