As a boy our family had buckets for different purposes. One light-weight bucket was the type we used in the sandbox my dad built. The sandbox was an elegant solution. I probably did not realize at the time how much time, thought and energy he put into creating that sandbox. Another bucket was designed for more heavy-duty purposes: cleaning the kitchen floor or for washing the Ford station wagon.

Even as an adult I have different buckets for different purposes. One is used for my tropical fish aquariums, another is used for washing the cars and still another is one I take when I go fishing with our grandchildren.

The bucket can also be a good way to think of different time-frames for your investment strategy. In a recent AAII Journal article, the three-bucket approach for what you have as investments is discussed in greater detail. I think of the three buckets this way:

  1. What do I need in the next couple of years to cover anticipated expenses and special one-time needs (like a replacement car)?
  2. What am I likely to need in the next 5-7 years?
  3. What will I potentially need for the longer term?

While I don’t agree with the “ASSETS” defined  for the “three to ten years” in the AAII illustration, the concept is helpful in avoiding the tendency of many to put far too many assets in “cash and cash-equivalents” when they should be investing a larger percentage of their assets in stocks and other investments likely to grow more quickly over the long haul.

It is conceivable that I could live another 20 years. My wife will probably live at least another 30 years or more. Too much cash too early in your life robs you of much better results. Most younger investors would be wise to focus on the bucket number 3 approach. You are young if you are between the ages of 15-55. If you are between 55-65, you can and should think longer term as well.

There are pros and cons to every approach. The following article helps you think this through. You need to be a disciplined person and disciplined investor regardless of your approach.