Bucket Strategies Underperform Static Allocation Strategies

Bucket strategies have grown in popularity due to their simplicity, but little academic research has been conducted on them.

Bucket strategies have grown in popularity among both financial planners and retirees. Their simplicity is a big reason why. These strategies separate a portfolio into two or three “buckets.” A cash bucket is used to fund withdrawals while the other one or two buckets are designated for portfolio growth and income. Despite their popularity, little academic research has been conducted on them.

An analysis by Javier Estrada, a professor at the IESE School of Finance in Barcelona, Spain, compared bucket strategies against more static strategies. He used a two-bucket approach. Bucket 1 held two years’ worth of withdrawals allocated to bills (e.g., Treasury bills). Bucket 2 was allocated to stocks and bonds. The static strategies allocated a fixed percentage to stocks and to bills. The 11 strategies ranged from 100% stocks and 0% bills to 0% stocks and 100% bills. In between, the allocations differed by 10-percentage-point increments (e.g., 90/10, 80/20, etc.).

Static Versus Bucket Strategies
Static Allocation	Failure Rate	Shortfall Years
100/0	3.5	5.7
80/20	2.3	2.5
60/40	0.0	—
40/60	3.5	2.3
20/80	25.6	4.6
0/100	67.4	5.4
Bucket rule 1	4.7	5.8
Bucket rule 2	3.5	5.3
Bucket rule 3	4.7	3.3

Three bucket strategies were used. Bucket rule 1 (BR-1) took withdrawals from the stock bucket (bucket 2) when the previous year’s return for stocks was positive; otherwise withdrawals were taken from the bills bucket (bucket 1). BR-2 withdrew from the stock bucket only when the previous year’s returns were above the long-term average. BR-3 took withdrawals from the stock bucket only when the average return of the past five years was higher than the long-term average.

When the strategies were compared using data for the U.S. over the 115-year period of 1900 through 2014, most of the static strategies held up better. All static strategies using an allocation of at least 40% to stocks had as good or better failure rates than the three bucket strategies. The failure rate measures the number of periods when a retiree would have run out of money. BR-1 and BR-2 also had a higher number of average shortfall years (years of retirement the strategy failed to support withdrawals) than most of the static strategies.

Estrada blames part of the relative underperformance on a key characteristic of bucket strategies: “Most implementations of the bucket approach, and clearly the most popular versions that involve parking in bills a fixed number of annual withdrawals, distribute funds from more aggressive buckets into more conservative buckets, but not the other way around … although bucket strategies avoid selling low … they do not take advantage of also buying low as static strategies do through rebalancing.”

Source: “The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?,” by Javier Estrada; SSRN, October 2018.