I am a big fan of Time-Segmenting your investments, and that is especially true when the stock market is behaving like it has the last few weeks.
Time Segmentation of Investments is a fancy way of saying Buckets of Money. It means investing money in a way that is appropriate based on when you will need to start spending it; In buckets.
Money is invested differently if you will need it within the next 12 months versus 12 years from now.
For those in the Accumulation Phase of their investing efforts, typically the first bucket of money is your Emergency Fund. This is an account that is earmarked for use if/when you have an emergency of become unemployed. This money is invested in something that has little or no risk or principal.
The next bucket would reflect money that you would be accessing at some further point in the future. If the target date is 3 years down the road the investments would be different that if the target date was 10 years away. The rule of thumb is the longer time the target date is away the more aggressive the investments can be (each individual’s investment objectives have to be addressed when considering risk levels).
For those invest in the Distribution Phase, meaning they are using their investments to provide some or part of their income needs, the Time Segmentation strategy is even more important.
Money that is needed today and up to 18 months from now is invested in something that doesn’t see any principal fluctuation. That is not different from the Emergency Fund in the Accumulation Phase.
The next bucket would be allocated for being spent starting 18 months from now and lasting three and half years, which takes you to 5 years from your Start Date.
The third bucket is for money needed starting 5 years from today and lasting another three years, taking us to 8 years out.
The fourth bucket takes over starting year eight and lasting for two more years.
This brings us to the fifth bucket, which is assets earmarked for years 10 and out.
And lastly, the sixth bucket is for money that will never be spent. This is Legacy Money and entirely optional.
Why this is so valuable, especially in times like these with extreme market fluctuations, is that when you earmark investments for use in the future, and you know you won’t need that money until that set-date in the future, you don’t worry about what is happening today. The money you need today is invested accordingly, in a way that these markets don’t affect it.
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Written by David Pintaric.
Securities America and its advisors do not provide tax advice. Please consult with your tax professional regarding your individual tax situation.