As previously reported, the “bucket strategy” sees investment portfolios split into three asset buckets: equities, diversified but defensive, and cash.
Schroders deputy head of fixed income Stuart Dear has outlined how in the current low-yielding cash environment, investors could consider dividing their cash bucket into three further segments, based on time frames.
We’ve outlined how to split the cash bucket into three suitable segments below, as advised by the investment manager.
The next 12 months – Preserve capital
Over the most immediate period, investors want the greatest degree of certainty and liquidity.
This section of the bucket would best be maintained as cash investments, held either as cash or in a term deposit.
One to two years – Preserve capital and generate regular income
According to Mr Dear, in this segment, investors can take a little more risk to invest for slightly higher returns.
This allocation that is away from cash should only be funneled into “defensively oriented strategies with high liquidity”.
Approximately 25 per cent should focus towards diversified fixed income while another quarter should be directed to absolute return income products.
Cash should still be a large part of this segment and comprise approximately 50 per cent of the segment, Mr Dear advised.
Two to three years – Generate higher income returns
The deputy head said the third segment can take on more risk again, “and this is where it may make sense to blend some of the higher-risk options alongside cash and more defensive options”.
He’s advised portioning this segment into quarters: 25 per cent in cash and term deposits, 25 per cent allocated to diversified fixed income, 25 per cent to absolute return income, and the last 25 per cent to higher-yielding alternatives.
According to the investment manager, “based on this strategy, investors would still hold a little over half of their ‘cash bucket’ in cash, but also utilise fixed income to lift their income generation without unnecessarily compromising the certainty of capital and liquidity requirements”.
