How Our T. Rowe Price Model Bucket Portfolios Have Performed

When it comes to managing a portfolio on an ongoing basis--especially one that consists of mutual funds or ETFs as opposed to individual stocks--I tend to believe less is more. Trading frequently leaves you vulnerable to the fear-greed cycle and also has the potential to rack up tax and trading costs. I like the idea of doing periodic checkups--once or twice a year and quarterly at most--but making changes only when something changes with your portfolio fundamentals or your own situation.

In that same spirit, I take a hands-off approach to managing my model portfolios that are available on Morningstar.com. The aim of these portfolios is to illustrate sound asset allocation and portfolio management strategies rather than fancy footwork; I'll make changes only if there's a meaningful change in the holdings or in the indexes that underpin the portfolios' asset allocations.

That said, the fund family retirement Bucket portfolios now have three years under their belts. That makes it a good time to take stock of how they've performed so far and whether anything notable has happened with their holdings or their asset allocation benchmarks.

The good news? Thanks to a still-strong equity market and the all-around solid nature of T. Rowe Price as a firm, all of the T. Rowe Price Bucket Portfolios have performed pretty well since their launch in the third quarter of 2018.

On the downside, one of the original holdings in my T. Rowe Price Aggressive Bucket Portfolio--and one of the portfolio's best performers--has closed to new investors. That's good for current shareholders, as the move is designed to preserve management's flexibility. But the portfolios are designed to be investable, so a closed holding can't stay in the portfolio. That necessitated a change in the Aggressive portfolio, but the other portfolios remain the same. Nearly all of the holdings retain medalist ratings from Morningstar's analysts: While a handful of the bond funds have experienced ratings downgrades over the past few years, some of the equity funds, such as

Indeed, it's worth noting that T. Rowe Price as a firm lends itself well to a hands-off mindset: It's a sober, responsible shop that uses patient, disciplined strategies to help shareholders reach their goals. And while the firm has experienced some management changes over the past decade, they've mainly been long-planned retirements as opposed to abrupt departures. The firm has typically managed these transitions gracefully.

Bucket Basics There are a few key items to note about the Bucket approach that I've been using in these model portfolios.

First, the long-term, stock/bond portions of the portfolio are designed with total return, rather than current income production, in mind. Thus, they assume that income distributions might help meet a portion of a retiree's income needs, but that he or she will also periodically rebalance, selling highly appreciated portions of the portfolio, to meet additional income needs.

Second--and here's where the buckets come in--the approach assumes that a retiree will hold a cash "bucket" alongside that long-term portfolio. He or she will spend out of the cash bucket, then periodically replenish that bucket with income distributions and rebalancing proceeds. The value of the cash bucket is primarily psychological: Knowing that one to two years' worth of living expenses are parked in cash, the retiree can put up with the volatility that will naturally accompany the long-term portfolio.

As with the other portfolios, I used Morningstar's Lifetime Allocation Indexes to guide the asset-class exposures for these T. Rowe portfolios. However, it's worth noting that retirees should customize their own asset allocations based on the extent to which they're spending from their portfolios. Say, for example, a retiree expects to spend 3% of her portfolio per year. Her Bucket 1 (cash) would hold 6% of her portfolio (two years' worth of living expenses), her Bucket 2 might hold another 24% of her portfolio (3% of her portfolio times eight years), and the remainder of her assets would go into Bucket 3.

To help populate the portfolios with specific funds, I leaned on Morningstar's medalist ratings and input from Morningstar’s analyst team, including Katie Reichart, Sarah Bush, and Bill Rocco.

Aggressive Bucket Portfolio Anticipated time horizon: 25 or more years

Bucket 1: Years 1-2 8%: Cash (money market funds and accounts, CDs, checking and savings accounts, and so forth; specific percentages will vary based on the amount of assets and the retiree's spending rate)

Bucket 2: Years 3-10

10%:

7%: T. Rowe Price Inflation-Protected Bond PRIPX

15%:

Bucket 3: Years 11 and Beyond

25%:

10%:

5%:

5%: T. Rowe Price Real Assets PRAFX

10%:

5%:

Performance 3-Year Annualized Return: 6.89%

The Aggressive T. Rowe Price Bucket Portfolio returned nearly 7% on an annualized basis over the past three years. The fact that it was the best-performing of the three T. Rowe Bucket Portfolios isn't surprising considering that it's the most equity-heavy of the three, with a roughly 55% equity weighting. All of the U.S. equity positions performed well, but T. Rowe Price QM U.S. Small-Cap Growth Equity was the standout over the period, gaining nearly 13% over the past three years. Morningstar recently upgraded that fund to Gold in recognition of its long-tenured management, disciplined quantitative process, and extremely consistent performance.

T. Rowe Price International Discovery, which focuses on small- and mid-cap stocks overseas and includes a healthy dollop of emerging markets, also pitched in extremely strong gains during the period.

Changes

As noted above, T. Rowe Price International Discovery closed to new investors this year. I decided to dedicate its previous allocation--5% of assets for the Aggressive Bucket Portfolio--to large-cap sibling

Moderate Bucket Portfolio Anticipated time horizon: 20 or more years

Bucket 1: Years 1-2 10%: Cash (money market funds and accounts, CDs, checking and savings accounts, and so forth; specific percentages will vary based on the amount of assets and the retiree's spending rate)

Bucket 2: Years 3-10 10%: T. Rowe Price Short-Term Bond 10%: T. Rowe Price Inflation-Protected Bond 20%: T. Rowe Price New Income

Bucket 3: Years 11 and Beyond 20%: T. Rowe Price Dividend Growth 10%: T. Rowe Price Equity Index 500 5%: T. Rowe Price QM US Small-Cap Growth 5%: T. Rowe Price Real Assets 10%: T. Rowe Price Overseas Stock

Performance 3-Year Annualized Return: 5.81%

The Moderate T. Rowe Price Bucket Portfolio returned nearly 6% on an annualized basis over the past three years. With a roughly 50% equity weighting, it benefited from many of the same forces that lifted the Aggressive portfolio. However, it lacked exposure to the strong performing International Discovery, and its bond positions all posted middling returns relative to their peer groups.

Changes: None.

Conservative Bucket Portfolio Anticipated time horizon: 15 Years

Bucket 1: Years 1-2 12%: Cash (money market funds and accounts, CDs, checking and savings accounts, and so forth; specific percentages will vary based on the amount of assets and the retiree's spending rate)

Bucket 2: Years 3-10 13%: T. Rowe Price Short-Term Bond 10%: T. Rowe Price Inflation-Protected Bond 25%: T. Rowe Price New Income

Bucket 3: Years 11 and Beyond 20%: T. Rowe Price Dividend Growth 10%: T. Rowe Price Equity Index 10%: T. Rowe Price Overseas Stock

Performance 3-Year Annualized Return: 4.99%

With roughly 60% of its assets in cash and bonds, this portfolio's returns were naturally below its more equity-heavy counterparts amid the strong equity market over the past three years. The portfolio's equity allocation is also more "vanilla" and large-cap-oriented than the Aggressive and Moderate portfolios. That complexion held back returns relative to those portfolios in a market paced by small-cap growth stocks, but should have a volatility-smoothing effect in an equity market sell-off. Linchpin equity holding T. Rowe Price Dividend Growth, for example, focuses on companies with the financial wherewithal to pay and increase dividends, a strategy that has typically led to lower volatility than the broad market.

Changes: None.