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Holistic Advising: The 5 bucket approach

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Intro:

All too often we see both clients and financial advisers operating with their ‘blinkers’ on; meaning that the client hasn’t told the adviser of all their holdings, or that the adviser hasn’t factored in all the clients holdings into his/her investment strategy.

A classic example of this could be that the client already has 2x investment properties totalling $300,000 USD and the adviser is putting together a $1,000,000 portfolio which now contains an Real Estate Investment Trust (REIT) of $100,000. While this may be only 10% of the investment allocation, it is now forming 28% of the client’s total net worth allocation (to date) and could then be ‘overweight’ and while an investment property and a REIT might not be ‘like for like’ they should certainly be taken as a correlation.

How you can remedy this problem is to primarily ensure that you have a good, honest and open relationship with your adviser. You do not always have to tell your adviser ‘everything’ you have, however if you are looking to get your best performance from your adviser, I have found that this is a good strategy. Some of my clients tell me “I have $XXX,XXX with a family friend or that I have my own stock account for options trading and am looking at keeping that separate”. At least then it allows me to get on with my job of providing a truly holistic retirement plan for them.

The 5 Bucket approach:

This sets up my 5 bucket strategy introduction well, as some people assume it’s a pure ‘asset allocation’ model such as a traditional 60/40 equity/bonds, but it is not, it’s a strategy for ensuring you are maximising your earning potential while employed and minimise your risk when retired.

 

 

As you can see from the above chart, the funds flow from the most risky to the least risky and are designed to try and keep the sectors ring fenced. For example, if there is a stock market crash that will negatively affect the ‘growth’ bucket 5, however this should mean that your Gold holdings in bucket 2 increase. If both are liquid, this would mean that you can still maintain an income stream for retirement without the need to draw down from negative positions (closing a loss).

This is also a holistic structure that will allow you to grow your assets while employed by filling up your holdings from Bucket 5 backwards. Another thing people often do not understand about ‘risk’ in investing is how to best structure your draw down. You want to be drawing down from your least risky assets first in retirement. This allows you a longer investment timeline for growing your wealth in the most attractive sectors such as Biotechnology and FANGS type investments.

This leaves the cash there as a ‘for emergencies only’ bucket which can cover medical/family/employment or even stock market crashes. If for some reason you found a situation where ALL your 4 invested buckets were negative for the quarter, you could fall back on cash and not need to touch your portfolio.

If properly implemented this strategy allows you to keep a good eye on your whole portfolio and ensure that you don’t have any ‘blind spots’ in your planning. It should also provide you decent growth, diversification as well as protection throughout retirement.

 

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