Archives for June 2013

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“Bucket” Asset Allocation Strategies

As I mentioned on Monday, the asset allocation section of Can I Retire? has been reworked for the new edition. I thought it would be a good idea to offer an explanation for the change.

The prior edition presented a “buckets” method for determining how much of the portfolio to put into cash, how much in bonds, and how much in stocks. In place of that discussion, the new edition includes a discussion of various factors affecting the risk level of your portfolio (e.g., stock/bond breakdown, credit quality of your bond holdings, and duration of your bond holdings), making the case that for any given investor, rather than one perfect asset allocation, there is a whole spectrum of reasonable asset allocations.

Buckets: A Mental Accounting Method

The point of the buckets concept is simply to make it easier to decide how much money to have in each asset class — that is, to give people an intuitive way to settle on an asset allocation.

There is not, however, any economic significance to the mental partitioning of the portfolio into three separate “buckets.”  It’s akin to the way in which some people have separate savings accounts for specific goals, or the way in which some people use a cash budgeting system with separate envelopes for each part of the monthly budget (e.g, gas, groceries, entertainment). The money doesn’t care which savings account, envelope, or bucket it’s in. There’s no economic point to separating the money. But, for various reasons, it can make things mentally easier.

Unfortunately, based on reader feedback, it appears that I did not make that sufficiently clear in the first edition of the book, and a significant number of readers got the impression I was making the case that there is something inherently preferable about a bucketed portfolio to a non-bucketed portfolio.

In the end, I decided to eliminate the bucket discussion completely and replace it with something that is, I hope, more difficult to misconstrue.

Avoiding Analysis Paralysis

As we’ve discussed several times here on the blog, without the use of a crystal ball, there’s no such thing as a perfect portfolio. The best we can do as individual investors is create a portfolio that is in the right general ballpark for our personal level of risk tolerance.

Yet, almost everyday, I hear from investors who are fretting about small changes (e.g. carving out a 5% allocation to REITs at the expense of other stock holdings) or who have a portfolio that they know is a mess but that they can’t bring themselves to change until they figure out the perfect asset allocation for their new, updated portfolio.

So the goal with the rewritten section on asset allocation is to help investors avoid (or overcome) “analysis paralysis” by being as explicit as possible about the point that “good enough” really is good enough. Or, as Jack Bogle once wrote (quoting a Prussian general, apparently), “The greatest enemy of a good plan is the dream of a perfect plan.”

Retiring Soon? Pick Up a Copy of My Book:

Can I Retire Cover

Can I Retire? Managing a Retirement Portfolio Explained in 100 Pages or Less

Topics Covered in the Book:
  • How to calculate how much you’ll need saved before you can retire,
  • How to minimize the risk of outliving your money,
  • How to choose which accounts (Roth vs. traditional IRA vs. taxable) to withdraw from each year,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"Hands down the best overview of what it takes to truly retire that I've ever read. In jargon free English, this gem of a book nails the key issues."

Two Free Books About Retirement

Just two brief announcements for today:

First, the 2013 edition of my book Can I Retire? is now available, and from now through Wednesday, the Kindle version is available free of charge, and the print version is just $5 on Amazon.

In addition, fellow blogger Darrow Kirkpatrick’s new book Retiring Sooner is available free as a Kindle book (and $5 as a print book) through Wednesday.

About Darrow’s Book

For those of you who haven’t yet come to recognize the name from my weekly roundups, Darrow Kirkpatrick is one of my favorite personal finance bloggers. He’s not a financial professional. Rather, he’s simply a normal guy who did all the right things to retire early (at age 50).

Darrow’s new book is a very nuts-and-bolts guide for how to follow in his footsteps and retire well ahead of the typical schedule.

Click here to see Darrow’s book on Amazon and download the free Kindle version.

About the New Edition of Can I Retire?

The changes to Can I Retire? include:

  • Updates to reflect changes in tax law,
  • Brief discussions throughout the book of how today’s low interest rates affect various retirement planning decisions,
  • An additional section (originally shared here on the blog) about how to decide how much of a portfolio to devote to an annuity and when to do so, and
  • A reworking of the discussion of asset allocation to place more emphasis on the idea that there is no single best allocation for a given investor, but rather a range of perfectly reasonable allocations. (Wednesday’s article will discuss the reason behind this change in a bit more depth.)

Click here to see the new edition of Can I Retire? on Amazon and download the free Kindle version.

Answers to Questions

I don’t own a Kindle. Can I still read the Kindle edition somehow?

Yes. There’s no need to own a Kindle to read a Kindle book. They can be read using free software on a regular PC or Mac.

I’ve already read the prior edition. Should I buy this one too?

Overall, it’s the same book with the same message, so there’s probably no need to buy it again. (On the other hand, for a price of zero, there’s little reason not to pick up the Kindle version.)

Can I tell other people about the promotion?

Please do.

I already have the old edition on my Kindle. How do I update it to the new edition?

Before buying the new one, you’ll have to delete the old edition from your Kindle and from your Kindle account on Amazon. To delete an item from your Kindle account:

  • On Amazon go to the “Your Account” page,
  • Click on “Manage Your Kindle” in the “Digital Content” section, and
  • Click the “actions” drop-down menu for the book in question and choose “delete from library.”

I hope you find the books helpful! Here are the links one more time:


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