Statistics show that stocks, over the long term, produce 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, 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 day-to-day 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.
Ensuring that clients continue to have enough money for living expenses (Bucket #1) is easy to do: 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.
During the more than 25 years since we introduced the Two-Bucket Approach, stocks—as represented by CCM’s newsletter account—have always reached a new high within five years. Accordingly, clients using our approach have never been forced to turn a short-term “paper loss” into an actual loss of capital.