Gyroscopic Investing

HB Frequently spoke of having a separate VP if one so chose, isolated from the PP.

One investing concept I've read a lot about in different permutations is a "bucket" system. The standard bucket system I've read about is horrible, and usually involves separating stocks from bonds, and another bucket for cash, whereby the investor first depletes one bucket (i.e. cash first) before going into the other buckets, with the theory that holding the stock bucket for last gives it the longest time invested to "reduce risk."

I find that system silly, but a bucket-like system could be something of the following:

Bucket 1: PP
Bucket 2: Aggressive Boglehead 80/20 Stock/Bond portfolio
Bucket 3: VP

My thought would be the following. Invest in the different buckets. When you anticipate having enough money in all 3 buckets to retire, then retire. If your VP is doing well, then you retire early. However, you set it up so that the PP will have enough money in it, by standard retirement age, such that even if the VP drops to $0 then you can still retire on time.

The idea being that there's a 100% chance you can retire at 60 off of only the PP, assuming VP drops to $0. A 99% chance you can retire at 59 (Assuming the VP has some money in it)... and gradually drops down so you have a 0.01% chance to retire at age 30, assuming your VP has done something like 10,000% returns.

I added a middle bucket, of aggressive boglehead, simply sharing their name due to the fact it would be index funds. Perhaps 80% World Equity and 20% TBM, for example. The theory being if prosperity occurred, this bucket should beat the PP, and allow for retirement slightly earlier.

If one wanted to, they could create an all-cash bucket, and consider that an emergency fund, that gets depleted first before any other upstream bucket.

I'm not advocating this bucket idea, it's something that's come to mind that I'm curious to explore if only as an intellectual exercise.

I really don't see buckets 2 and 3 outperforming bucket 1 enough to make it worth the headache.

with the theory that holding the stock bucket for last gives it the longest time invested to "reduce risk."

Holding stocks longer does not reduce their risk. The best paper I've seen on this is here:

http://www.norstad.org/finance/risk-and-time.html

The bottom line is that the stock market is risky. You may cook along great for 19 years and need the money on year 20. But that year is when it dives in value and stays there for a long period.

I explain it like this. Let's say each year there is a chance of a massive stock market decline (The Dow lost 89% over the first few years of the Great Depression). Let's say it's 1%. That means each year there is at least a 1% chance you'll lose a large sum. Now you may go 20 years and it never happens, but that doesn't mean the risk isn't there. It also doesn't mean you may not hit that 1% chance on the exact year you need the money.

A widely diversified portfolio I feel offers the best chance of good long term returns.

Craigr, its facinating that your link says, "Past experience tells me that I am unlikely to win any converts with this missive". I'm perplexed that there isn't a hunger for such sensible advice that makes sense (at least to me). I suppose people seek wishful nonsense rather than reality.

I was also struck by how Robert Merton (of Long Term Capital Management infamy) was behind the formal proof that a long time horizon does not reduce risk. Warren Mosler claims to have devised the arbitrage strategy that was the mainstay of the LTCM strategy  .