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Investing Specialists

How Did the Bucket Portfolios Perform in 2022?

A tough market environment played to the strengths of these conservative-leaning portfolios, though they couldn’t escape losses.

An illustrative image of Christine Benz, director of personal finance and retirement planning of Morningstar.

This past year was likely an unnerving one for many retirees. Amid soaring inflation and rising interest rates, stocks and bonds both ended the year with double-digit losses, marking their worst simultaneous decline in more than 50 years.

Against this unforgiving backdrop, our Model Bucket Portfolios, including those composed of mutual funds as well as exchange-traded funds-only portfolios, all saw losses of between 8% and 11%. The equity-heavy Aggressive Bucket portfolios exhibited the biggest declines in value, while the Conservative portfolios did a somewhat better job of preserving capital.

Yet the Bucket strategy shows its advantages in market downturns. Because cash holdings of one to two years’ worth of portfolio withdrawals are a linchpin of the Bucket approach, Bucket-oriented retirees could have tapped their liquid reserves last year in lieu of touching depreciated equity or bond assets. They could have even reinvested their portfolios’ income distributions to put a bit more money to work in stocks and/or bonds when they were depressed.

Additionally, the portfolios’ diversification within asset classes—specifically, their exposure to short-term bonds and dividend-paying stocks—gave them a boost last year relative to a simplified portfolio consisting of total market index funds and cash.

Here’s a review of the Bucket portfolios and how they performed last year.

Aggressive Bucket Portfolio (Mutual Funds)

8%: Cash

8%: Fidelity Short-Term Bond FSHBX

10%: Harbor Core Plus 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

2022 Return: negative 10.21

Five-Year Return: 4.36%

Moderate Bucket Portfolio (Mutual Funds)

10%: Cash

10%: Fidelity Short-Term Bond

5%: Fidelity Floating Rate High Income FFRHX

15%: Harbor Core Plus

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

2022 Return: negative 9.05%

Five-Year Return: 3.96%

Conservative Bucket Portfolio (Mutual Funds)

12%: Cash

12%: Fidelity Short-Term Bond

5%: Fidelity Floating Rate High Income

20%: Harbor Core Plus

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

2022 Return: negative 7.65%

Five-Year Return: 3.47%

Performance Recap

Because they include slightly larger cash weightings as well as heavier allocations to bonds, which outperformed stocks in 2022, the Conservative and Moderate Bucket mutual fund portfolios held up better than the Aggressive Bucket mutual fund portfolio did last year. That was a turnabout from 2019-21, when the equity-heavy Aggressive portfolio outperformed its more bond- and cash-heavy counterparts amid strong stock market gains. Over the past five years, the Aggressive portfolio outperformed the Moderate one and the Moderate portfolio bested the Conservative version.

The portfolios’ diversification across subasset classes also helped pare losses relative to a hypothetical portfolio of total market index funds and cash mirroring the same asset-class exposures. For example, the Aggressive portfolio lost 10.2% last year, versus 14.4% for a total stock/total bond/total international fund/cash portfolio with the same general asset-class exposures. The Moderate portfolio dropped 9%, versus 13.5% for a similarly allocated portfolio of total market index funds and cash. The Conservative portfolio lost 7.7% versus a 12.7% loss for a hypothetical portfolio of core index funds and cash.

The portfolios’ decent downside protection is as intended, given that they’re geared toward people who are actively drawing upon them for their retirement spending. On the equity side, the portfolios’ largest holding, Vanguard Dividend Appreciation, lost nearly half as much as Vanguard Total Stock Market, largely because of the former fund’s high-quality tilt and relatively light stake in the fast-growing technology stocks that bore the brunt of last year’s selloff.

In a similar vein, the portfolios’ diversification across bond types helped limit fixed-income losses relative to a total bond market index fund. While Harbor Core Plus stayed even with the Bloomberg U.S. Aggregate Bond Index in last year’s bond market rout, the portfolios’ exposure to short-term bonds, short-term Treasury Inflation-Protected Securities, and floating-rate loans all helped reduce exposure to interest-rate changes and in turn muted the portfolios’ losses. From a practical retirement-spending standpoint, the fact that these holdings lost much less than intermediate-term bonds means that they’re well suited to serve as next-line reserves for spending if a retiree’s cash bucket is running dry.

Portfolio Changes

None, though it is worth noting that Harbor Core Plus (formerly Harbor Bond), the core fixed-income holding in the three portfolios, underwent substantive change in 2022. Harbor switched its longtime subadvisor Pimco to Income Research + Management in February of last year; the firm also cut expenses across all share classes. The Institutional share class in the portfolios earns a Bronze rating and is available with a transaction fee through mutual fund supermarkets like Schwab’s. (The more expensive share classes earn Neutral ratings.) Given that the fund held on to its Morningstar Medalist rating and its new managers ply a sensible, no-frills strategy, I retained it in the portfolios.

Aggressive Bucket Portfolio (ETFs)

8%: Cash

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

2022 Return: negative 10.70%

Five-Year Return: 4.61%

Moderate Bucket Portfolio (ETFs)

10%: Cash

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

2022 Return: negative 9.05%

Five-Year Return: 4.07%

Conservative Bucket Portfolio (ETFs)

12%: Cash

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

2022 Return: negative 7.61%

Five-Year Return: 3.24%

Performance Recap

The Aggressive and Moderate mutual fund portfolios held up a hair better than did the analogous ETF portfolios in 2022, but the return differential between the two sets of portfolios continues to be small. That’s a good indication that their risk exposures are closely aligned, which was one of my goals in setting them up. In prior years, the ETF portfolios had demonstrated a slight performance edge relative to the mutual fund portfolios, so their five-year performance is also better.

Most of the performance patterns that the mutual fund Bucket portfolios exhibited last year carried over to the ETF portfolios as well. The Conservative ETF portfolio held up better than the Moderate portfolio, and the Moderate fared better than the Aggressive one. Over the past five years, the more stock-heavy Aggressive portfolio still beats the Moderate and Conservative ones.

As with the mutual fund portfolios, the ETF portfolios benefited from their diversified exposures—in particular, their stakes in less-interest-rate-sensitive bonds as well as exposure to high-quality dividend-growth stocks. All three portfolios lost substantially less last year than portfolios consisting of total market index funds and cash would have lost. For example, the Aggressive ETF portfolio dropped 10.7% last year versus 15% for a similarly allocated portfolio of cash and total market funds. The Moderate ETF portfolio fell 9% versus a 14% loss for the total market index fund/cash portfolio with similar asset-class exposures. Finally, the Conservative ETF portfolio lost 7.6%, while a total market index/cash portfolio dropped roughly 13%. The fact that it focused its equity exposure on Vanguard Dividend Appreciation contributed to that big performance advantage, as did its inclusion of shorter-term bonds, short-term TIPS, and a floating-rate fund.

Portfolio Changes

None.

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.