One of the advantages of enjoying the “great outdoors” when traveling by raft versus hiking is the ability to carry hundreds of pounds of gear to make the experience conspicuously posh: tents, cots, chairs, tables, stoves, kitchen equipment, and food.

Rafters do not carry mounds of camping gear only to eat a backpacker’s meal of dehydrated food. Meat, fish, poultry, cheeses, fruits, and vegetables are required! How do you keep perishable food fresh for many rafters on a 4-6 day river trip? A 100-plus quart cooler stocked with food, beverages, and ice is mandatory! When the cooler is opened at every meal to access its contents—and more frequently for cold beverages—the cold air within the cooler escapes and is replaced by warm air. Ice can melt rapidly, and food for meals on the last day or two can be compromised.

The equivalent of ice melting in a cooler (and the perishable food within spoiling) is stock prices falling in a market decline (and your portfolio losing value).

Last month’s newsletter discussed in detail how Portfolios A and B can have the same annual returns over a 10-year period but experience those returns year to year in a different order; yet each will grow to the same dollar amount (depicted as solid lines in the chart below). But “open the cooler” to distribute retirement income each year from both of these portfolios and “the ice can begin to melt”. The resulting growth of each portfolio (depicted as dashed lines) can be significantly different in that same 10-year period. Your financial security can be at risk, particularly if Portfolio B is yours. If you sell securities during a down market, you might convert what otherwise is a temporary “paper loss” into a permanent loss. (The assumption is that markets will eventually come back to recover the loss.) Might you anxiously sell stocks to protect the value of your portfolio from further market declines? Ideally when income is needed, you sell a security only during an up market when you have profits. Predicting consistently the performance of the financial markets is considered impossible. Whereas a Monte Carlo simulation (also discussed in last month’s newsletter) will simulate the wide range of possible investment returns your portfolio might experience (and thus inform you as to the probability of the success of your retirement plans), a Monte Carlo simulation is not very informative as to how to invest your money. Consider investing some money in a second “cooler”, a portfolio management tool called the Bucket Strategy. The Bucket Strategy relies on two key investment principles. The first: When you need your money determines how you invest your money. And the second: Invest conservatively for near-term income needs and invest for growth for long-term needs. Money you need in the near-term is invested within an “Income Bucket” that buys cash equivalents and shorter-term bonds—assets that are considered relatively safe and not subject to wide fluctuations in their price. Selling these investments for income could occur with little or no loss while still providing you with a small investment return. Money you do not need for many years is invested in the “Growth Bucket” that buys primarily equities (stocks, mutual funds, and exchange traded funds “ETF”). Since your near-term income is coming from the Income Bucket, there should be no need to sell investments in the Growth Bucket during a market downturn—thus avoiding conversion of a (presumably) temporary paper loss into a permanent loss. (At times, selling a stock at a loss may be prudent based on its investment merits.) Your Income Bucket will eventually be depleted by your income withdrawals, and you will need to fill the bucket back up with money from your Growth Bucket. With the two buckets, you have the luxury of determining the timing of the sale of your growth investments. Sell when your Growth Bucket has benefited from an up market rather than being forced to sell for income during a down market. Diligently monitor the Growth Bucket and take profits to replenish the Income Bucket long before the Income Bucket is depleted. The existence of the two buckets might help you tolerate the inherent risk of investing in the financial markets. You might not feel as anxious about a down market’s negative effect on the value of the equities in your Growth Bucket if you know you have multiple years of income to “weather the storm” given conservative investments in the Income Bucket. Last month’s newsletter touted the importance of a Cash Flow Study to your financial health. But the Study has a flaw: it assumes your returns do not fluctuate year to year but steadily grow at the same annual rate. That will not happen in the real world; returns almost always vary year to year. The Bucket Strategy can help you realize the Study’s long-term return assumptions by avoiding the sale of assets whose values are declining in a down market and the resulting negative impact on long-term portfolio growth. A Cash Flow Study can also help you solve a challenge with the Bucket Strategy: how do you determine the difference between a near-term income need and a long-term income need? Is your need within the next two years? Five years? Ten years? Different scenarios of the Study can be illustrated to help you make that determination. Your decision will be greatly influenced by your tolerance to accept investment risk.