Market-Proofing Your Retirement Portfolio (Mostly)

I’ve said it before and I’ll say it again – risk is inevitable. Even if you’re not into the day-trading lottery or putting all your savings in crypto, the possibility of gaining something always comes with the scary possibility of losing something too. Come to think of it, playing it safe has its own risks too (like, say, losing to inflation). It’s true for finance and it’s true for life.

Sorry if I’m stating the obvious – after all, even the Bible points this out. But it’s funny how often even the most intelligent people will assume there’s some foolproof technique for protecting their retirement portfolio – or living to 100, playing the perfect golf game, finding true love, whatever – if they can only figure out what that technique is.

Let me remind you: no such technique exists for any of that stuff. 

As we discussed a couple weeks ago, even the most well-built retirement portfolio is vulnerable to the vagaries of the stock market. In particular, retirees need to be aware of their “sequence of returns risk;” the disproportionate damage that can be done to their portfolio if the first decade or so of retirement coincides with a rough patch in the markets. 

Since you can’t foretell the performance of the stock market, there is no perfect technique for protecting your retirement portfolio from this phenomenon (surprise surprise). That said, there are still some very good techniques. So let’s get some good news and look at a couple.  

Use “bucketing” to stretch out your assets

Once you’re actually in retirement and using your portfolio for income, the basic dilemma is one of liquidity. That is, how much of your portfolio do you want to have readily accessible as cash, and how much of it do you want to keep invested for growth? 

One popular method of addressing this problem is known as “bucketing.” 

Basically, you divvy up your assets into separate accounts or “buckets.” In general there are three main ones that may or may not be divided into further “sub-buckets,” although this will look a bit different for everyone. 

First, you’ll have a bucket for your stable, long-term assets such as bonds; then another for more volatile, higher-yield stocks; and, finally, a bucket for cold hard cash. Each of these buckets serves a distinct purpose – although the rules will change depending on the circumstances (more on that in a minute). 

You generally want these buckets to be arranged in a consistent hierarchy, kind of like a champagne fountain. Your high-yield stocks will be at the “top,” – that is, furthest out of reach so that they have the most time to grow. Those funds will gradually “overflow” into the second bucket of consistent, lower-yield bonds. The overflow from there, in turn, makes its way down to the final bucket of cash.

the "bucketing" strategy between cash, stocks and bonds
vector graphics from vecteezy

It’s important to note that this last bucket has a twofold purpose. Obviously, it serves as your day-to-day retirement income. But you also want to make sure that there’s a sizable backup fund on hand: you should have enough cash to live on during a rough patch, and also enough left over to “siphon back” to the top of the fountain.

Keep your portfolio balanced

One of the problems with bucketing is that it can quickly make your portfolio lopsided. As you empty one of the buckets, you become disproportionately dependent on the others – and that’s dangerous. Hence “portfolio rebalancing,” which is exactly what it sounds like: restoring the overall balance in your portfolio as different sections of it grow or shrink. 

“Balance” doesn’t necessarily mean equality, of course. Your portfolio will be weighted in favor of certain investments over others, depending on your personal financial goals and appetite for risk – say, for example, an allocation of 55% equities, 35% bonds and 10% cash. “Rebalancing,” then, means depleting certain investments and beefing up others in order to maintain whatever your target allocation is.  

The mechanics of this are important, however. Remember that your buckets aren’t just holding different types of fancy money. Bonds, equities, T-bills, whatever – they’re all assets, things you own that you can then turn around and sell for money. That selling process, and the time it takes, is what makes such assets less “liquid” than simple cash.

Conversely, if you want to refill one of your depleted buckets, you do so by buying more of whatever asset it’s holding. So rebalancing your portfolio doesn’t just mean shuffling money around between different accounts. It means buying and selling assets, replenishing and offloading them as necessary in order to maintain whatever allocation works best for you.

Use “decision rules” against market volatility

Because of the time and complexity of these transactions – moving funds between stocks and bonds and cash – you need to be very intentional about rebalancing. Before you even get to retirement, you’ll want to set up what are called “decision rules,” or guidelines for when and how to perform rebalancing on your portfolio. 

Again, such rules will look slightly different depending on your situation. But they’ll generally look something like these:

  1. When the value of your stocks is up, sell enough of them to replenish your cash and bond supply as necessary. 
  2. Conversely, when the value of your stocks is down, buy more of them using any excess cash and/or proceeds from selling extra bonds. 
  3. Make sure you always have enough cash to meet your income needs for two years, then use anything in excess of that to rebalance stocks and bonds as necessary. 

The objective of these rules is twofold: to meet your income needs even when the market is down, and to grow your portfolio when the market is up. Like everything in finance, it’s all about balancing security with opportunity. 

Of course, if the markets struggle for long enough (i.e. a decade or more), then even a tight rebalancing strategy may not completely protect you – recall the business about “sequence of returns risk.” But again, the point is to manage risk rather than eliminate it altogether. 

Investment management: putting everything together

The techniques we’ve discussed here are all intricately connected and sometimes may even be in tension with each other. Although the decision rules above are laid out straightforwardly, the underlying challenge is far more complex than it first appears. Well worth it, however; see this chart for proof: 

graphic from

Consider the example of a recession again. When stocks are down but you need to replenish your cash, you’ll probably do so by selling off some bonds. Then, once your bonds have been depleted a bit, the rebalancing strategy demands that you replenish them. 

But how do you do that? You could sell off some of your stocks and use that cash to buy up more bonds. Except… the whole reason you were selling off bonds in the first place was to avoid selling off any of your stocks! So that’s not a great solution.

This is part of why your “cash bucket” needs to have so much extra in it beyond your immediate income needs – a situation like this could be a good use for those funds. But that depends on a lot of factors. How bad is the current downturn? How long is it likely to last? Would it maybe be better to buy more stocks instead of bonds, since they’re so cheap now anyway? Etc. 

As you can see, coordinating all these moving parts gets complicated fast. So uh… not to blow my own horn here, but this is why financial planners can be so invaluable. Depending, of course, on the size and complexity of your portfolio, your own financial savvy, your personal wealth goals, etc. etc. etc. 

If nothing else, though, I hope this article gives you a useful snapshot of the strategies that are available to you. Good portfolio management is a challenge for sure – but it will make all the difference for your portfolio and, therefore, for your retirement.