Volatility and Buckets

The Challenge and Opportunity of Volatility

If you’re a younger investor, volatility can actually work in your favor. Of course, if it leads to a layoff or income disruption, that’s a significant life event and shouldn’t be downplayed. But as long as your income remains steady, market volatility offers a chance to dollar-cost average into quality investments at better values.

For more mature investors, volatility often carries greater weight. It tends to be “felt” more acutely as retirement approaches and the focus shifts from growing wealth to relying on it for income.

Similarly, interest rate changes impact people differently depending on where they are in life. Younger investors often prefer lower rates—they make borrowing cheaper for buying homes, cars, or funding education.

On the other hand, mature investors tend to benefit from higher interest rates. Higher yields on savings and fixed income investments mean more income with similar levels of risk—especially important when you’re no longer earning a paycheck but still facing rising costs due to inflation.

Volatility—and change in general—can bring both opportunity and challenge. It all depends on who’s affected and what’s shifting. As we move through life’s stages, it’s important to remain mindful of which risks matter most to us and plan with those in mind.

Understanding Asset Buckets

Identifying buckets of assets is a valuable exercise—even if you’re still in long-term growth or wealth accumulation mode. If you experienced a setback or hardship, it helps to know the order in which you’d draw from your assets until things stabilize. For mature investors who have entered—or are nearing—the distribution phase, this exercise takes on even greater importance. The formula is simple but offers a reassuring framework, especially when the world and investment markets feel especially chaotic.

Cash is your core asset bucket.  As you approach retirement, you may want to increase your reserves as an extra cushion to cover your needs and let your longer-term investments ride.  I knew a successful investor who kept two years of expenses in cash which gave him the peace-of-mind to let his equity investments run their course.

The long-term bucket—typically with more equity exposure—is the one you don’t plan to tap into for a while, or may use for moderate, recurring distributions. With many of us now expecting to spend 20 or more years in retirement, thanks to increasing longevity, it’s essential to include growth-oriented assets that help your wealth continue to expand and keep pace with inflation. Entering retirement with a diversified portfolio that includes 50–60% exposure to a broad mix of equities is generally considered a responsible and sustainable approach.

Longest-term money for your heirs: If you’re fortunate to have more assets than you’ll need throughout retirement, you can afford to take on higher risk—and potentially higher growth—in accounts likely to flow through to your heirs. In this light, keeping greater exposure to diversified equities may be especially beneficial in Roth IRAs, which will vest tax-free to beneficiaries.

The Not-Cash-Bucket is a more conservatively managed pool of assets designed to supplement your cash reserves. While it may include some equity exposure, it’s typically less than what you’d hold in longer-term accounts. This bucket serves as a bridge between your cash and your long-term growth investments. Over time, you can draw from the Not-Cash-Bucket to replenish your cash or stability funds as needed. If equities are down, this bucket—given its more moderate exposure—will likely decline less, helping reduce the impact of “selling at a loss.” As you spend down your cash, you can take periodic distributions from the Not-Cash-Bucket and delay tapping into longer-term growth assets until conditions are more favorable (such as an upward-moving equity market).

The Impact of Time and Volatility on Asset Buckets

The funny thing about aging is that long-term assets eventually become short-term. I remember investing in my daughters’ 529 plans when they were born, thinking that college was a lifetime away. And yet, here we are—one of those accounts is now depleted as my oldest nears college graduation.

When markets are booming and asset values are climbing, it’s easy to view cash and stable investments as a drag on potential growth. But in times of volatility—such as during economic contractions or periods of market and business uncertainty—having clearly defined asset buckets and allocating accordingly can bring much-needed peace of mind.

Everyone’s financial situation is different, which is why working with an advisor to develop a strategy and allocation tailored to your needs can make a meaningful difference.