A. First, what is the "bucket strategy"? It is a popular approach for financial advisors managing volatility for retired clients, where several years’ worth of cash is held in a side “bucket” to provide both a liquid reserve to tap for spending (without needing to withdraw from portfolios while they’re down) and a psychological buffer against the volatility.
However, despite their ongoing popularity, Tomlinson in Bucket Strategy - Challenging Previous Research notes that the actual academic research for bucketing strategies is not so positive. In fact, studies have long suggested that bucketing strategies don’t actually enhance the performance of portfolios in the aggregate during a bear market, and can actually result in less retirement spending simply due to the long-term drag of the cash itself.
A recent such study by Javier Estrada similarly found that bucket strategies didn’t necessarily help mitigate retirement plan failures (especially for those whose spending rates were reasonable in the first place), and instead was more damaging due to the drag of cash returns instead. In a follow-up analysis by Tomlinson himself, another version of rules-based bucket strategies (where withdrawals are taken from cash if stock returns are negative, and from stocks if their returns are positive, using excess returns if available to replenish the cash bucket) was tested looking in particular at the historically-challenging 1966 retiree and again found that bucket strategies performed worse than simple static balanced portfolios. Notably, in wider tests of the data – both internationally using Estrada’s data, and on a Monte Carlo basis with Tomlinson’s analysis – bucket strategies often at least performed ‘similarly’ to static allocations of balanced portfolios.
The bottom line - the results suggest that at best, bucket strategies produce ‘similar’ returns to simply holding balanced portfolios and that their value is only psychological (in the client comfort of having the cash reserves available), but that in practice bucket strategies may represent a scenario where clients are accepting the psychological benefits at a cost of what will actually be lower long-term retirement spending.