Go and purchase any number of books on the topic of investing, building wealth, or retirement planning, and most of the authors will speak about their version of ‘investing into buckets’. It is certainly a theme shared by most of the world’s greatest and well-known investment experts.
What do we mean by ‘investing into buckets’?
In this article, we will break down what we mean by spreading your investments across multiple buckets, and this really does refer to timeframes and goals. We will talk about the types of assets that would likely appear in those buckets.
And, we will discuss ‘mindset’. This quite possibly plays the most important role in your investment journey.
To sum this all up, an investor should break their investment horizons or goals into short-term, medium-term, and long-term investing.
Essentially, by this we mean financial costs or goals that will happen in the next 2 years, those that will happen in the next 2-5 years, and those that will be in the 5-10 year+ range, or the long-term. And, the latter could very well be decades away, if we’re talking about retirement planning.
So, the latter is about the distant future version of yourself. You need to look after the future version of you. Not just the ‘here-and-now’ version of you.
Why and how?…
It has been noted by experts that when people look to their future, they often see the most desirable outcome playing out for themselves down the track. They see that mortgage free home. They see their nest-egg large enough to make them financially independent. They look to the future with rose-tinted glasses. In other words: ‘She’ll be right mate’…
She won’t be right mate… Statistically around 90%+ of Kiwis are not prepared for retirement.
Here is the massive paradox: Whilst people will generally look to their financial futures and see private jets and a home dolphinarium – The truth is more akin to baked beans on toast for tea and stacking the shelves at Pak n Save into their 80s because they simply have to earn more income to supplement the NZ Government Super.
In other words they think about, want, and desire the best outcome, then promptly go and do nothing about it! The majority of Kiwis are in this situation. It’s truly sad.
It’s at this point that you need to ask yourself: Is that a light at the end of the tunnel, or is it actually a train coming towards me?
You need to move from ‘knowledge’, to ‘understanding’, to ‘wisdom’…. What do we mean by that?
‘Knowledge’ is knowing that you are standing on railway tracks in a tunnel and that the train is coming towards you. You’re not necessarily doing anything about it. You just know you’re there.
‘Understanding’ is recognising that you are standing on the railway tracks and that the train will hit you if you stay put. You’ve had the realisation that ‘oh my goodness, I now know what it costs to fund my retirement and I am not prepared’. So, you come to grips with a plan as to how you will tackle your financial goals, both in the here and now, and into the distant future.
‘Wisdom’ is action! It’s getting your backside of that track and fast, out of the way of train, stepping to one side as it passes, then seeing that there actually really is a light at the end of the tunnel, and that this is your new destination.
In other words, you do something about it!
As you can see, it’s one thing to understand that there are different buckets to be investing across, but it’s an entirely larger leap to have a plan in place that takes into account how you will navigate these investment timeframes in your life.
We simply have to stress this point up front: You must have a plan.
If you fail to plan – You plan to fail…
I think I’ve raved on about that enough – Let’s now break down the three buckets, their timeframes, and how to invest (including the typical assets in each bucket).
It’s important to note – You may not have any short-term spending or financial goals. The same could be said for medium-term too. Don’t worry, it’s OK. You may simply be focussed on becoming financially independent, and have nothing in the lead-up to that that requires funds to be available. Again, that’s OK. You may also, after reading this information, note that there’s a few things you need to work on, and all-of-a-sudden you do recognise gaps in your existing strategies, and work on fixing those gaps. It’s all improvements, it’s all moving in the right direction.
Have you got a financial plan in place? Do you know your short, medium, and long-term financial goals? Do you know what it costs to run your life? Do you know what it will cost to fund your retirement?
Most we meet need somewhere between $1.5M – $3M as an investment net-worth to fund their retirement.
When was the last time you sat down with your partner (or yourself if you’re single) and discussed (or thought long and hard about) retirement/financial planning?
If the answer to that feels awkward, perhaps it’s time to do something about it.
Bucket 1:
This bucket is for immediate needs like your family’s cashflow and budgeting and for any purchase or financial goal likely to take place in the next two years.
When speaking with clients and running through a holistic strategy with them, the first on the list that we touch on is ‘cashflow management’. We put this at the top of the list because I really do believe that having full knowledge of, and systems around where your money is coming from, and what it’s being spent on, is the secret ingredient in financial plans working out for you.
Not sure if you can tell but I am shying away from using the term ‘budgeting’ – because for a lot of people, this is a bad word!
However, to take advantage of bucket 1, you simply should have a budget that tracks incomings and outgoings. Again, this is the ‘wisdom’ part of the spectrum.
These habits will literally drive your financial well-being.
Once you have an understanding of your cashflows, you will know how to look after the here and now when it comes to your money. You will minimise surprises. And if there’s one thing mum-and-dad investors hate, it’s surprises!
From there, if there are any large purchases in the next two years, you will be ready for them, and will have budgeted how you will afford them.
In terms of where you should be investing funds that need to be spent in the next two years, the answer to this is quite simple: Cash…. Yup, that’s right… Not very sexy I know. The thing about cash is that it won’t fluctuate in value, and it will be there when you need to get your hands on it for those financial goals/purchases. If you need a definite amount to be available, and it can’t have dipped in any way due to the markets, you really must put these savings into cash.
When we say ‘cash’, we mean products like bank savings accounts or term deposits.
So that’s bucket 1, and this is for any expenses or goals that will arise in the next two years.
As a side note, if you have large amounts of money sitting in cash, then you need to ask yourself: Am I going to spend all of this cash in the next two years?
If not – You’re investing in the wrong place. Your buying power is going backwards at a rate of knots due to inflation.
Bucket 2:
The medium term…
This bucket is invested for expenses or financial goals that will take place in the next 2-5 years.
The types of assets that might appear in this bucket are cash, bonds, and fairly predictable dividend yielding/paying shares (we have some of the best in NZ and Australia).
There are certainly Managed Funds that apply to these timeframes and would be considered a ‘conservative’ investment. But, you would definitely say that this sits a notch above cash when it comes to ‘risk’, hence the slightly longer recommended timeframe for investment.
Any number of banks or financial advisers could point you in the direction of this type of investment solution.
Bucket 3:
This bucket is for long-term wealth creation and growth, even retirement planning, or planning for financial independence.
Really, the types of timeframes and assets that sit in this bucket should be considered to be a 10 year+ investment time horizon.
Anything in that 5-10 year range would arguably be a combination of buckets 2 and 3, dependent on your risk profile.
So what types of assets would you put into your bucket 3?
Residential investment property, growth shares (shares that are geared towards growth as opposed to dividends), commodities (like gold and silver), and cryptocurrency. Being careful not to put all of your eggs into one basket. Diversification is key.
This is the ‘get-rich-really-bloody-slowly-scheme’ end of your investment spectrum. Assets and investments into this bucket are the ‘set-and-forget’ type. This really does mean you need to seek quality advice at the front-end to select these assets, and quality management out the back-end. This is so that you can just get on with your life and not have to continually be pulled into time-sucking situations linked to the asset.
Mainly this would be in relation to an asset like investment property, which is why we think it’s a no-brainer to have a great property manager, and a property specialist accountant.
You have to expect that in this third bucket that there will be market fluctuations and volatility. This bucket is not to be looked at on a daily basis.
This is what we mean by mindset. The best and most seasoned investors in the world understand and come to expect that their wealth will fluctuate in value. This is normal.
The goal is to see this bucket trend upwards in value over a long period of time. Not over a matter or weeks, months or even a year or two.
If you have an app on your phone that takes in account bucket 3, do yourself a favour and check it maybe once every year, or once every two years.
Life Cycle/Life Stage Options
Regardless of whether you have short, medium, and long-term financial goals, you should still look to have an age-based asset allocation that spreads your wealth/savings across all of the above.
The younger you are, the more growth or bucket 3 you’d have in your allocations.
And, that strategy should annually rebalance or ‘change’ as you get closer to retirement.
In conclusion, I want to repeat that old and important adage:
If you fail to plan, you plan to fail.
Understand your cashflows, your financial goals, and your retirement planning – Spread your investments across the buckets in a way that applies to your unique financial situation and desired outcomes.
Then, the vail will drop, and financial security becomes that much more likely.
Have fun!
Daniel Carney
Financial Adviser/Managing Director
Goodlife Financial Advice