How Did the Bucket Portfolios Perform in 2023?

In contrast with 2022, when cash was the only asset type in my Model Bucket Portfolios that landed in the black, every holding in all six of the portfolios delivered a positive return in 2023. (For my core retirement portfolios, there are three mutual fund portfolios and three exchange-traded fund portfolios. There are also portfolios geared toward retirees’ taxable accounts—a series consisting of traditional mutual funds and another composed of ETFs.) Those 2023 winnings provide an opportunity for investors to rebalance, trimming appreciated equity holdings and replenishing cash and bond holdings that may have slipped below their target allocations. Such rebalancing may be necessary for retirees who spent from their cash buckets (Bucket 1) to provide living expenses in 2022. For a basic Bucket approach, I typically recommend that retirees hold one to two years’ worth of portfolio withdrawals in cash reserves.

Given that equities performed best in 2023, it’s not surprising that the Aggressive portfolios, which hold roughly 60% of their assets in stocks, outperformed the more conservatively positioned Moderate and Conservative portfolios, which hold roughly 50% and 40% in equities, respectively.

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

Mutual Fund Portfolios

Aggressive Bucket Portfolio (Mutual Funds)

8% Cash

8%: Fidelity Short-Term Bond FSHBX

7%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX

10%: Harbor Core Plus HABDX

7%: Vanguard Wellesley Income VWIAX

15%: Vanguard Total Stock Market Index VTSAX

25%: Vanguard Dividend Appreciation Index VDADX

20%: American Funds International Growth and Income IGIFX

2023 Portfolio Return: 12.89%

2023 Blended Benchmark Return: 16.21%

Moderate Bucket Portfolio (Mutual Funds)

10%: Cash

10%: Fidelity Short-Term Bond

10%: Vanguard Short-Term Inflation-Protected Securities Index

12%: Harbor Core Plus

3%: Fidelity Floating Rate High Income FFRHX

5%: Vanguard Wellesley Income

10%: Vanguard Total Stock Market Index

25%: Vanguard Dividend Appreciation Index

15%: American Funds International Growth and Income

2023 Portfolio Return: 11.54%

2023 Blended Benchmark Return: 14.67%

Conservative Bucket Portfolio (Mutual Funds)

12% Cash

10% Fidelity Short-Term Bond

10% Vanguard Short-Term Treasury Inflation-Protected Securities

15% Harbor Core Plus

5% Fidelity Floating Rate High Income

3% Loomis Sayles Bond LSBDX

5% Vanguard Wellesley Income

20% Vanguard Dividend Appreciation Index

12% American Funds International Growth and Income

8% Vanguard Total Stock Market Index

2023 Portfolio Return: 10.64%

2023 Blended Benchmark Return: 12.92%

Performance Recap

In a reversal from 2022′s stock rout, the equity-heavy Aggressive mutual fund portfolio outperformed its Moderate and Conservative counterparts in 2023, thanks in no small part to its roughly 60% equity exposure. (The Moderate and Conservative versions hold roughly 50% and 40%, respectively, in stocks.)

Index fund enthusiasts can take heart in the fact that Vanguard Total Stock Market Index was the best performer in these portfolios over the past year. Vanguard Dividend Appreciation Index, the largest holding in any of the portfolios, lagged the broad market in 2023 after delivering a standout defensive showing in 2022′s tough equity market. The dividend-growth fund returned just 14% last year, versus a 26% gain for the broad market. And while international stocks delivered a fine showing in absolute terms, they generally lagged U.S. names last year.

The fixed-income holdings in the portfolio all posted positive returns in 2023, with the higher-risk holdings in the portfolio generally delivering the largest gains. A dash of Fidelity Floating Rate High Income provided the Moderate and Conservative portfolios with a boost on the fixed-income side. One of the most positive developments is that the cash that appears in varying weightings in all of the portfolios—Bucket 1—is finally contributing a positive inflation-adjusted return. For the sake of modeling, I assume Vanguard Federal Money Market for cash returns. In 2023, that fund returned 5.09%. (That good yield is a reminder to check your cash holdings to ensure that you’re wringing as much from them as you can while the getting is good.)

I always compare the portfolios’ performance to a blended benchmark of basic index funds that matches the portfolios’ asset-allocation exposure. The goal is to see whether security selection has added or subtracted value; I would urge you to conduct the same exercise with your own portfolio. While I was able to tout the portfolios’ stellar bear-market showing relative to the index-fund benchmark in 2022, that pattern reversed itself last year. The major culprit was Vanguard Dividend Appreciation Index, which suffered for its lack of technology-sector exposure in a red-hot year for such stocks. The fund’s top holdings are Microsoft MSFT and Apple AAPL, but relative to a total U.S. stock market index fund, it’s light on “Magnificent Seven” names like Amazon.com AMZN and Nvidia NVDA. Given that a key goal of holding Vanguard Dividend Appreciation Index is to provide equity exposure while limiting downside volatility, I’m not bothered by its weak relative showing last year. However, investors who would like to maintain a minimalist portfolio consisting of basic index funds can reasonably do so; I’ve provided some model in-retirement portfolios along those lines.

Portfolio Changes

My aim is to take a light touch with respect to portfolio changes, and I urge investors to do the same with their own portfolios. However, I’m swapping in Fidelity Total Bond FTBFX in place of core bond holding Harbor Core Plus. The Harbor fund had long been a Morningstar favorite and a backdoor way for do-it-yourself investors to gain access to Pimco management, but it underwent substantive changes in 2022. Harbor switched its subadvisor from Pimco to Income Research + Management. The fund has performed well since the change, and Harbor also cut its expenses, but our analysts are dropping it from coverage. The Fidelity fund is a standout in the core-plus intermediate-term bond Morningstar Category, and it features long-tenured management, a repeatable process, and reasonable expenses of 0.45%. However, as a core-plus fund, it courts more credit risk than funds that land in the intermediate core bond category. Investors could reasonably use a total bond market index fund or an actively managed option like Baird Aggregate Bond BAGIX in its stead; such intermediate core funds feature even lower costs and will tend to be more reliable equity ballast than funds in the core-plus group.

ETF Portfolios

Aggressive Bucket Portfolio (ETFs)

8%: Cash

8%: Vanguard Short-Term Bond ETF BSV

7%: Vanguard Short-Term Inflation-Protected Securities ETF VTIP

10%: iShares Core Total USD Bond Market ETF IUSB

4%: Vanguard High-Yield Corporate VWEAX

3%: iShares J.P. Morgan USD Emerging Markets Bond ETF EMB

25%: Vanguard Dividend Appreciation ETF VIG

15%: Vanguard Total Stock Market ETF VTI

20%: Vanguard FTSE All-World ex-US ETF VEU

2023 Portfolio Return: 13.23%

Moderate Bucket Portfolio (ETFs)

10%: Cash

10%: Vanguard Short-Term Bond ETF

10%: Vanguard Short-Term Inflation-Protected Securities ETF

12%: iShares Core Total USD Bond Market ETF

3%: Fidelity Floating Rate High Income

2.5%: Vanguard High-Yield Corporate

2.5%: iShares J.P. Morgan USD Emerging Markets Bond ETF

20%: Vanguard Dividend Appreciation ETF

15%: Vanguard Total Stock Market ETF

15%: Vanguard FTSE All-World ex-US ETF

2023 Portfolio Return: 12.33%

Conservative Bucket Portfolio (ETFs)

12%: Cash

10%: Vanguard Short-Term Bond ETF

10%: Vanguard Short-Term Inflation-Protected Securities ETF

20%: iShares Core Total USD Bond Market ETF

3%: Fidelity Floating Rate High Income

2.5%: Vanguard High-Yield Corporate

2.5%: iShares J.P. Morgan USD Emerging Markets Bond ETF

28%: Vanguard Dividend Appreciation ETF

12%: Vanguard FTSE All-World ex-US ETF

2023 Portfolio Return: 9.71%

Performance Recap

As with the mutual fund portfolios, the Aggressive ETF portfolio (60% in equities) outperformed the Moderate ETF portfolio (50% in stocks), which in turn bested the Conservative ETF portfolio (40% in stocks). That was a reversal of their showings in 2022 when the Conservative portfolio held its ground better than its more equity-heavy counterparts.

The Aggressive and Moderate ETF portfolios performed a bit better than the analogous mutual fund portfolios in 2023. Meanwhile, the Conservative mutual fund portfolio returned slightly more than its Conservative ETF counterpart. But the return differential between the ETF and mutual fund portfolios continues to be small, an indication that their risk/return profiles are pretty closely aligned.

Like the mutual fund portfolios, the ETF portfolios lagged their ultra-minimalist benchmarks of cash plus total market index funds mirroring their asset-class exposures. Here again, Vanguard Dividend Appreciation, the largest equity holding, explains much of the underperformance. Its conservative positioning held it back relative to a total market index fund in last year’s rally. However, Vanguard Dividend Appreciation, plus exposure to shorter-term bonds helped the model portfolios hold up significantly better than the blended index-fund portfolio in 2022. Given that retirees are often less risk-tolerant than people who aren’t actively spending from their portfolios, erring toward the side of conservatism seems reasonable. Retirees who are more comfortable with equity-related volatility could reasonably hold a minimalist ETF portfolio along these lines.

Portfolio Changes

No changes, though investors may want to do some rebalancing following 2023′s strong gains in equities. That exercise might be especially valuable for investors who spent from their cash buckets in 2022 and would like to top them back up to their target allocations. This article does a deeper dive into the topic of maintaining a bucket strategy following 2023.