Cash buckets are earned to keep them as market slides. Just don’t hold to much.

Financial adviser Harold Evansky pioneered the cash bucket strategy in 1985 to keep clients calm during market downturns and not to sell lost shares to raise money. He initially asked clients to keep a two-year supplementary living expenses in a cash bucket, but later reduced it to one year’s worth.

Ivensky, now 79 and retired from planning, often disagrees with how the bucket method is used today. Some advisers put the cost of living up to 10 years in the short-term and medium-term bucket and the long-term investment in the third bucket. Evensky prefers his simple two-bucket approach: one for cash, the other for long-term investment. He says one year of value is a lot of cash to protect investors from market volatility, and holding more than that reduces returns.

Ivensky, who has a degree in civil engineering and has taught private finance for years at Texas Tech University in Lubbock, Texas, also lags behind some of the conventional wisdom of personal finance. For starters, Ivensky does not agree with the belief that people naturally spend less after retirement; He says they spend less because they have less. If they save more while working, they will spend more in retirement, he said.

We drove her to her home in Lubbock. Her response has been edited.

Baron’s retirement: Why did you come up with the bucket method?

Ivensky: Two reasons: It was difficult to withdraw money at the wrong time; And when investors see their portfolio tanks, they panic and sell out. By having a cash reserve that they know where their groceries are coming from, they can be stunned while everyone else is jumping off the hill.

Why is it difficult to withdraw money at the wrong time?

If you are raising money in the bear market, you are probably selling equity, which is probably not the right time to sell equity. That’s when you want to buy. You want to buy less and sell higher, which is the opposite of what most people do.

How to avoid that bucket of cash?

With a bucket of cash, you will not be forced to sell any of your long-term investments. You have control over when you sell them because you are financing your living expenses from a bucket of cash.

When will you refill the bucket?

As you monitor your investment portfolio at different times, you need to rebalance. At that time you refill the bucket of cash. Or if there is a big run up in the market, and you are going to sell some stock to buy bonds, you take some of that money and back up the bucket of cash.

What happens during a prolonged crummy market?

You should then sell the bonds to buy your stock, so you use the opportunity to take some of the bond sales and re-balance to fill up the cash bucket back up.

How often does it happen?

This has never happened since we started using it in the 1980’s. There is always the opportunity to refill the cash bucket from rebalancing. But if this happens, you will dive into your investment portfolio and sell the short end of your bond-term portfolio where there will be little or no loss.

Some market experts do not like cash buckets.

There is, of course, a lot of paperwork about the inefficiency of the cash bucket. And I can’t agree with pure math. If you set up a bucket of cash, there is an opportunity cost because that cash is not a long-term investment. And that’s where I believe the behavioral aspects outweigh any potential difficulties.

When you first started using it in 1985, did you realize that cash buckets would have a calming effect on investors?

I don’t think I understand how strong the impact will be. Go back to the 1987 crash. The world seemed to be over. That was really scary.

One thing I’ve done is come on the phone and start calling clients. No one was happy. But no one panicked, and no one called and said, ‘Harold, I can’t stand it. Take me in cash. ‘

How does your system work?

My goal was simplicity and something that was understandable to clients and something that they could easily live and manage. The only change over time was that the cash bucket originally had a two-year supplemental cash flow. Several years later we did an academic analysis of it and came to the conclusion that one year was the best. This has reduced the cost of having the opportunity to have more cash.

What do you mean by supplemental cash flow?

There is no need to set aside 100% of your annual expenses. Only those expenses which will not be covered by pension, social security etc. This is a much smaller number than your annual expenses.

Some people keep cash and bonds worth up to 10 years in buckets. Is it wrong?

I am biased but the answer is yes. It may sound good in the short run because people think, ‘Wow. I am very safe. ‘ But if someone is not very rich, they cannot afford that opportunity.

Not only that, the simple method has worked wonderfully. It worked during the ’87 crash. It worked during the tech-stock bust, it worked during the Great Recession. There is evidence in pudding.

Do you use a bucket method to invest your money?



It’s not that I probably need it. It’s your own cooking idea. That’s what we tell clients to do, and I think that’s what we should do.

How is your money invested?

My wife and I probably have 70% fixed income and 30% equity. This has changed significantly since I retired and over the years I have been fortunate to have accumulated significant wealth. Asset allocation is a function of what I need to achieve my goals.

Do you think the stock market is ready for collapse?

The answer is yes, but it has been telling me that over the years, and it does not affect our investment philosophy. I’m not a big believer in market time.

You were trained as an engineer. How did you become a financial advisor?

A kind of strange route. After the military, I joined my family’s building business in Florida and started my own home building business a few years later. I liked what I was doing, but due to high inflation and mortgage rates it had no future when home buyers could even get financing. I got a job as a stock broker.

I was not really dissatisfied with the brokerage, but they never understood what I wanted to do.

What did you want to do?

I wanted to plan financially, not just sell investments. Every morning the manager would bring a list of clients and how much money they had in the money market and he would say, ‘This client has a lot of money. There are some really good bonds to buy. Why don’t you call them? ‘

And I would say, ‘I know what they need. They don’t need any of this. ‘

Studies have shown that retirees spend less as they get older. You do not agree.

The problem is that these studies do not indicate that they are spending less because they want to spend less or they have to spend less. That’s a big difference.

Obviously those who have limited resources are probably spending less because they have to spend less. But for those investors who have assets, when someone retires, the main change is that they have time on their hands. Time is money spent. Join the Country Club. Take those cruises with your kids around the world.

I think the general conclusion that they spend less is nonsense.

So as a wealth consultant, do you plan to retire with clients having the same costs?

Yes. When we are planning, it is based on year after year goals. Some years it may be too much because they want to travel the world which they always dreamed of and next year, they will not travel. But I think it is wrong to assume arbitrarily that they will cost less.

You have a pretty conservative approach. This means that many people need to save more while working.

Excluding the word conservative, I agree with that. I think it’s wise.

There is nothing unconventional about living in a dream world.

Anything else I should have asked you?

There are hundreds of papers on risk tolerance. And I’ve finally come to the conclusion that the only reasonable definition of risk tolerance is the extent to which a client calls me before and says, ‘Harold, I can’t stand it. Take me in cash. ‘

If you are deciding on your stock-bond balance, you will be reasonably confident that when all the hell is loosened, you can live with it. And worse, when all hell goes down, you’re better prepared to do the opposite of what everyone would normally do. You have to sell what is good and buy what is bad.

When did you have to do that?

The most painful time that I went through was the Great Depression. We are big believers in maintaining balance. OK, the market went down and we said, ‘OK, we have to sell the bonds and buy the stock.’ And everyone said, ‘OK, sure.’

And then went down again. And we said, ‘You know we have to do it again,’

And they said, ‘Well, are you sure about that? The market just seems to be in a free fall. ‘ And we said, ‘Yeah, that’s what we have to do.’

And then it went down again, so we balanced three times. It was hard.

Did everyone go along?

Everyone went along, not happily. But in hindsight, it certainly worked.

As we say to the people, ‘Look! If the market continues to decline forever, all bets will stop, and nothing will happen to what you have done. We will all go to hell together. ‘ We do not plan for Armageddon. We have a fundamental belief that over time the domestic and global economy will grow with the investment market.

Thank you, Harold.

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