Two-Bucket Approach

Statistics show that stocks, over the long term, produced higher returns than bonds, Treasury Bills and real estate. However, despite their attractive performance, stocks have a drawback: Their returns are volatile. The market, while achieving new highs in every decade since the 1930s, also experiences setbacks as deep as 40-50%. On average, over last 70 years, the S&P 500 has fallen in one of every five years. Yet in 95% of all five-year spans, the index has posted positive results.

Therefore, to invest with Check Capital Management, one should see the big picture, namely, that the superior performance of stocks means additional volatility. But we help clients prepare for it with our “Two-Bucket Approach”.

“Bucket #1” holds money needed to cover your shorter-term needs, such as living expenses. This money should be placed in money-market funds, short-term bonds and other relatively stable investments. We make bond purchases for clients that are customized to fit their individual circumstances.

Next comes “Bucket #2”, which holds stocks and their associated higher returns. This bucket contains money that shouldn’t be needed for the next three-to-five years. This allocation means not having to sell stocks after a year or two of poor performance, which—historically—tends to be just when the market does best.

At the end of each year, if stocks (Bucket #2) are at a new annual high, money is transferred from Bucket #2 to refill Bucket #1.  The discipline to do this review each year and look to only move money from stocks when they are at a high are keys to proper asset-allocation.

For risk-adverse clients, we recommend that five years of withdrawal money initially be placed in Bucket #1. Stocks, as represented by CCM’s Quality Growth Program, have always reached a new high within five years of refilling Bucket #1. Therefore, our low-risk clients have never been forced to turn a short-term “paper loss” into an actual loss of capital.  For clients willing to accept a little more risk, we believe the allocation of just three or four years of withdrawal money to Bucket #1 to be appropriate.