Bucket theory of portfolio management….i hope you have heard it.

Instead of saying what it is, let me describe a case study – and you will understand it better!

Mr. A is a retired person (retired means does not do any activity to earn money, and he is fully dependent on his portfolio for his expenses). All the numbers and assumptions are imaginary, so please do not comment on ‘how can returns be so high or low’.

Mr. A comes to me in year 2xx0 and says ‘Subra I am retiring in the year 2xx1 and expect to live for another 25 years, so my portfolio too should live for 25 years, and after that I do not care what happens. SUCH a portfolio is called a ‘wasting’ portfolio – like a mine – it can theoretically go to ZERO on the date of Mr. A’s death. That would be awesome planning.

So I took his Rs. 2 crore portfolio and created the following assets:

Rs. 80 lakhs in equities and equity mutual funds

Rs. 80 lakhs in debt mutual funds

Rs. 30 lakhs in government and post office schemes

Rs. 10 lakhs in bank, nbfc, company fixed deposits.

Let us assume his ANNUAL expenses are Rs. 3 lakhs a year (has own house, new car not much mileage, no travel, and a small town).

This means he has his next 25 years expenses ALREADY in debt oriented schemes. (How to withdraw? that is a different post)

How such a portfolio helps is in being able to tell the friend/ client…assuming the debt markets and equity markets are volatile, the returns from the markets are say the following:

Year    Equity returns   debt returns

2xx1            8%                          10%

2xx2           -11%                         6%

3                     72%                       8%

4                      12                           4%

5                        -5                        11%

Tell the client when the equity returns are poor, look at the DEBT FUND returns. Debt was obviously expensive in the 2nd year and 4th year…and equity was expensive in the 3rd year. Keep looking at the buckets and use times of irrational returns to do an asset re allocation.

So sell EQUITY in the 3rd year (yes the debt returns were NOT attractive -but you were selling to protect capital, and that would have happened).

I hope there is some clarity …equity bucket, debt mf bucket, govt debt bucket and liquidity buckets. 4 buckets here…

You can also create a metals bucket, real estate, commodity, trading,….etc..

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  1. Good piece, and every person can improvise based on his/her needs. One important fact to remember for us conservative Indians is this> Don’t confuse between earned income and cash flow.

    Expenses are cash flow outgo, and need not necessarily be less than earned income on a year-to-year basis. Some years the expenses may amount to greater than earned income, but in other years, capital gains, accumulated withdrawals, fund redemptions (including profits/interest) will be much greater than expenses. What you need to ensure is that on a cumulative basis, your assets should sustain you for the forseeable future.

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