Thursday, 12 January 2023 14:36

Morningstar Bucket Models Outperform Market in 2022

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While many model portfolios produced lackluster returns last year, there is one type of model that was able to limit losses, the bucket strategy. First developed by wealth manager Harold Evensky in 1985, the bucket strategy is a “now versus later” approach by dividing investors’ retirement savings into two segments. The first was a cash bucket to meet five years of living expenses and the second was an investment bucket for longer-term growth. Essentially the bucket strategy separates assets according to when they are going to be spent. The cash cushion was for the early years of retirement, while the growth segment was for maximizing the rest of the portfolio over a longer period. Morningstar’s Christine Benz created her own bucket portfolios which included those composed of only mutual funds and those that only included ETFs. Her three mutual fund bucket portfolios, which range from aggressive to conservative, only saw losses of 7.65% to 10.21% last year, compared with the S&P 500’s loss of 18.11%. This shows the advantages of a bucket strategy in market downturns as the downside protection from cash was able to buffer losses. Benz’s models also included allocations to short-term bonds and dividend-oriented stocks, which outperformed other bond and equity strategies.

Finsum:Morningstar’s bucket portfolios outperformed the S&P 500 last year by a wide margin due to cash buffers and exposure to short-term bonds and dividend stocks.

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