Investing in Shares is a Gamble
I had a young girl come to who said “investing in shares is a gamble”.
She was too scared to put any of her $1,000,000 inheritance into shares, and at the same time she was scared of running out of money. You see, she was eating through her money very quickly. She had begun with $1,500,000 around 5 years ago and it had rapidly decreased.
I presented the Bucket Strategy to her which explained how to manage the two risks she was facing:
1. Risk of losing money if she invests in shares.
2. Risk of running out of money if she doesn’t invest in shares.
The Bucket Strategy can help reduce both these risks. The strategy works like this:
Bucket 1 – you have 12 months of living costs: invested in cash
Bucket 2 – you have 5 years of living costs: invested in cash/bonds/term deposits IE safe assets. we now have 6 years of living costs up our sleeve when you combine both buckets 1 &2.
Bucket 3 – the remainder of the money can be invested in growth assets (shares, property etc). If there is a market downturn this bucket doesn’t need to be touched for 6 years, which allows plenty of time for the market to recover back to its original values. Meaning, you are never forced to sell your shares in bad times, which reduces a large amount of risk.
How does the strategy work when the market is going well?
The distributions from Bucket 3, trickle down into Buckets 1 & 2 continually topping them up to cover 6 years of your living expenses.
This is a great strategy for retirees and pre-retirees, who wish to begin drawing a passive income from their wealth. Please seek advice before implementing anything.
General Advice Warning: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.