How Well Did the Bucket Portfolios Perform in 2021?
Strong equity gains provide bucketers with an ample source of cash flow for the years ahead.
Income is scant. Most high-quality bond funds posted small losses in 2021 owing to impending interest-rate hikes. But retirees using a Bucket system for managing their portfolios know how they'll raise cash for the years ahead: selling appreciated equity assets.
The S&P 500 returned nearly 30% in 2021, notching its third-straight year of double-digit gains. And while many other equity market segments failed to best the blue-chip index, most stock indexes posted gains that were strong in absolute terms. The MSCI EAFE, for example, gained 11% last year. It was a very good year for stocks of all kinds.
Thanks to strong equity market gains, the Aggressive versions of my Bucket Portfolios, which hold more than half of their assets in stocks, enjoyed the strongest returns: The Aggressive mutual fund and exchange-traded fund versions both gained more than 11% last year. The Conservative versions, which have lower stock positions and bigger weightings in cash and bonds, performed the worst, though they still managed solid gains in absolute terms.
After standout showings from 2019 through 2021, though, it's reasonable to brace for the possibility that stock gains could revert to the mean. That underscores the importance of "bucket maintenance" for retirees who are using a Bucket system. If retirees have been spending from their cash buckets to meet ongoing living expenses, it's reasonable to use appreciated equity assets to help refill it. Any additional rebalancing from equities could be deployed into the portfolio's cash sleeve (Bucket 1) and/or bonds (Bucket 2). Doing so has the salutary effect of reducing risk in the portfolio and also reducing the retiree's vulnerability to sequencing risk, the chance of experiencing weak market returns early in retirement.
To use a simple example of how the rebalancing/refilling process would work, let's say a retiree began using the Aggressive ETF Bucket Portfolio upon retirement at the beginning of 2020, seeding it with $1 million dollars and employing a 4% starting withdrawal with inflation adjustments thereafter. Withdrawals from Bucket 1 would have amounted to roughly $85,000 over that stretch (the initial $40,000 draw plus an additional $40,000 plus inflation in year 2). But with appreciation on the portfolio's three equity funds amounting to more than $220,000 over that same two-year period, the retiree would have the latitude to use rebalanced equity proceeds to top up the depleted cash bucket and deploy the additional $135,000 into cash or bonds if he or she wanted to take some risk off the table.
Of course, that's a highly simplified example. But it's still safe to say that bucket investors looking to raise cash and keep their portfolios' risk levels in check have ample opportunities to do so following 2021, provided they maintained decent exposure to equities last year. High-quality bonds were no great shakes, but equities and lower-quality bonds more than made up the slack.
Here's a review of the Bucket Portfolios and how they performed last year.
8%: Fidelity Short-Term Bond (FSHBX)
10%: Harbor Bond (HABDX)
7%: Vanguard Short-Term Inflation-Protected Securities Index (VTAPX)
10%: Vanguard Wellesley Income (VWIAX)
10%: Vanguard Total Stock Market Index (VTSAX)
24%: Vanguard Dividend Appreciation Index (VDADX)
15%: American Funds International Growth and Income (IGIFX)
8%: Loomis Sayles Bond (LSBDX)
2021 Return: 11.06%
10%: Fidelity Short-Term Bond
5%: Fidelity Floating Rate High Income (FFRHX)
15%: Harbor Bond
10%: Vanguard Short-Term Inflation-Protected Securities Index
5%: Vanguard Wellesley Income
10%: Vanguard Total Stock Market Index
20%: Vanguard Dividend Appreciation Index
10%: American Funds International Growth and Income
5%: Loomis Sayles Bond
2021 Return: 9.49%
12%: Fidelity Short-Term Bond
5%: Fidelity Floating Rate High Income
20%: Harbor Bond
11%: Vanguard Short-Term Inflation-Protected Securities Index
5%: Vanguard Wellesley Income
23%: Vanguard Dividend Appreciation Index
7%: American Funds International Growth and Income
5%: Loomis Sayles Bond
2021 Return: 7.35%
Several of the same performance trends that prevailed in 2020 carried into 2021--namely, U.S. equities reigned supreme.
Reprising its status from 2019 and 2020, Vanguard Total Stock Market Index was the top-performing holding across the portfolios in 2021, gaining 26%. Core equity holding Vanguard Dividend Appreciation Index trailed the total market index by a few percentage points. The main drawback for the dividend-growth-focused index fund was its underweight in technology stocks--it holds just 16% in the sector, whereas total stock index funds hold more than one fourth of their assets in technology. Vanguard Dividend Appreciation Index also suffered for its lack of energy holdings in a year in which energy mounted a strong recovery. Yet, I'm comfortable with the fund as a core holding in the Bucket Portfolios because its high-quality focus has generally helped it hold up better on the downside than the index and its Morningstar Category peers. Minimalist investors could reasonably obtain U.S. equity exposure through a total market index fund alone, whereas retirees who like to receive a bigger share of their cash flows from dividends might consider Vanguard High Yield Dividend Index (VHYAX).
Bond performance flip-flopped in 2021 from a year prior. Whereas high-quality bonds carried the day in 2020, thanks to the Federal Reserve's aggressive lowering of interest rates at the onset of the pandemic, they struggled in 2021 as the Fed signaled it would lift rates this year. Core bond holdings Harbor Bond and Fidelity Short-Term Bond lost small amounts last year. There was one exception to the weakness in the high-quality bonds story, though: Vanguard Short-Term Treasury Inflation-Protected Securities Index enjoyed a fabulous year as inflation picked up, sparking demand for inflation protection.
The more-credit-sensitive holdings in the portfolios also enjoyed a strong year thanks to sentiment about an improving economy. Both Loomis Sayles Bond and Fidelity Floating Rate High Income ended the year solidly in the black.
None, though I'm monitoring Harbor Bond closely in the wake of a December announcement that the fund company would be replacing longtime subadvisor Pimco with another firm, Income Research + Management. Its expenses are supposed to go down following the switch, but the fund is currently under review as our analyst team gauges the impact of the change.
7%: Vanguard Short-Term Bond ETF (BSV)
10%: Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
13%: iShares Core Total USD Bond Market ETF (IUSB)
28%: Vanguard Dividend Appreciation ETF (VIG)
13%: Vanguard Total Stock Market ETF (VTI)
15%: Vanguard FTSE All-World ex-US ETF (VEU)
3%: Vanguard High-Yield Corporate (VWEAX)
3%: iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)
2021 Return: 11.57%
7.5%: Vanguard Short-Term Bond ETF
12.5%: Vanguard Short-Term Inflation-Protected Securities ETF
7.5%: Fidelity Floating Rate High Income (FFRHX)
15%: iShares Core Total USD Bond Market ETF
22.5%: Vanguard Dividend Appreciation ETF
10%: Vanguard Total Stock Market ETF
10%: Vanguard FTSE All-World ex-US ETF
2.5%: Vanguard High-Yield Corporate
2.5%: iShares J.P. Morgan USD Emerging Markets Bond ETF
2021 Return: 9.59%
13%: Vanguard Short-Term Bond ETF
15%: Vanguard Short-Term Inflation-Protected Securities ETF
20%: iShares Core Total USD Bond Market ETF
6%: Fidelity Floating Rate High Income
21%: Vanguard Dividend Appreciation ETF
7%: Vanguard FTSE All-World ex-US ETF
3%: Vanguard High-Yield Corporate
3%: iShares J.P. Morgan USD Emerging Markets Bond ETF
2021 Return: 6.35%
Because their asset-class exposures are similar, the performance of these three ETF portfolios closely mirrors that of their mutual fund counterparts. Whereas the Aggressive and Moderate ETF portfolios posted slightly better performance than their mutual fund counterparts in 2021, the Conservative ETF portfolio lagged the Conservative mutual fund portfolio by a slight margin. Strong performance at Vanguard Wellesley Income, which appears in the mutual fund portfolios but not the ETF, accounts for at least part of the differential.
As with the mutual fund portfolios, the Aggressive ETF Bucket Portfolio gained the most, thanks largely to its exposure to the total market index fund and Vanguard Dividend Appreciation ETF. The Conservative portfolio relies exclusively on Vanguard Dividend Appreciation ETF for its U.S. equity exposure and therefore missed out on the very strong performance of some of the names that paced the broad market last year, such as Apple (AAPL) and Microsoft (MSFT).
On the fixed-income side, Treasury Inflation-Protected Securities and lower-quality bond holdings (Vanguard High-Yield Corporate and Fidelity Floating Rate High Income) posted relatively strong gains, whereas iShares Core Total USD Bond Market ETF and Vanguard Short-Term Bond ETF logged small losses. IShares J.P. Morgan USD Emerging Markets Bond ETF was the worst performer in the portfolio as emerging-markets bonds, even those linked to the relatively strong U.S. dollar like the ones in this fund, slumped along with growth expectations in those markets.
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.