Alternative Investment Strategy – The Five Buckets

I endorse various investment strategies including the Permanent Portfolio (that I describe in detail at the SMIC Program), gold hedging, massive diversification, two buckets, and so on. Occasionally I’ll come across alternative strategies that I find interesting, even if they don’t completely apply to what I’m doing or if I disagree partially with certain aspects of them.

One of them I’ve come across lately is a strategy called five buckets. Guys like E.B. Tucker are into this strategy. I’m not sure if it’s something I would adopt 100% for myself, but I really like it and may emulate aspects of it. It may make sense for you. I’ll describe it, with my comments.

This strategy is based around buying what the markets are currently telling you to buy, rather than trying to “force” the market, which I think is very smart. By following the market, you are always buying low and selling high (if you sell at all).

Five buckets means you allocate your investments into, guess what, five buckets. These are:

  • Real estate
  • Gold
  • Permanent life insurance
  • Long-term stocks
  • Short-term stocks

In the real estate bucket, you purchase as much real estate as you can, as long as the deals make sense, but only when the real estate market is depressed and not doing well. As usual, buying low is always best. When real estate prices are high (like now), you don’t buy and you don’t add anything to this bucket. You can sell when prices are high, or hang on to your real estate and build a “forever” portfolio.

The gold bucket works the same way. When gold is low or stagnant, you buy as much gold as you can and add to your gold bucket. When gold starts rising in price, or when you think conditions are good for gold to start rising soon (like now), you don’t buy any gold and just forget about it for the time being.

Gold, under the five buckets strategy, is more of a very long-term play. Rarely do you sell gold under this model. You just keep buying it whenever it’s cheap and keep it for the very long-term.

I really like the concept of both of these buckets. In many ways, I’m doing aspects of this already. During the 1990s I bought tons of real estate and did very well with it. Then in the early 2000’s I bought tons of gold and did very well with that. Around 2006 I liquidated all of my real estate because I could see the writing on the wall, and by the time the real estate collapse of 2008 happened, I was just fine, didn’t lose a penny, yet made tons of money with my gold. As a matter of fact, as I talked about in The Unchained Man, I made so much money in my gold investments back then that I used those profits to finance my entire divorce. It was great.

The next bucket is where things get a little weird. This is the life insurance bucket. This bucket assumes you have children or a spouse or plan on having either of these things in your future.

In this bucket, you own several life insurance policies that all pay dividends. (Non-dividend-paying policies are not allowed in this bucket.) A lot of people consider life insurance policies as shitty investments (myself included, at least usually), but the five bucket strategy includes them because any extra money you put in this bucket on top of the annual premium grows 6% to 7% per year, tax free, which is pretty damn good based on today’s horrible interest rates.

The five bucket strategy then argues that if you never use the policy, over time, you’ll have a fairly large amount of cash in that bucket that you can spend, borrow from, or use to buy more life insurance.

If you die, your dependents are taken care of. If instead, you live a really long time, you use the life insurance policies as estate-planning tools to legally avoid some taxes.

This isn’t an article about life insurance, but it’s important you understand the two types. There is term life insurance and universal life insurance.

Term life insurance is the type usually recommended by most financial planners. It’s also the type of life insurance I buy when I need it. Term life insurance is a simple and very cheap monthly premium that you pay. As long as you pay it, your dependents are covered if you die. If you stop paying it, the policy ends and you get nothing. It never accrues in value and never carries any value, but it’s very, very cheap.

Universal life insurance is way more expensive than term life insurance, but instead, it actually holds a real value, like an investment, that you can borrow against, or in some cases, actually even spend. The downside (besides the massive cost) is that these “investments” are notoriously bad for multiple reasons. Not only are the rates of return low, but what happens if your life insurance company goes out of business?

The five bucket strategy likes the universal type for the reasons above. Feel free to make your own decisions. I tend to like term life insurance policies better, when they are needed, and allocating my investment money into investments I have a little more control over.

The next bucket is long-term stocks. This is a bucket where you purchase stocks in big, stable companies that pay dividends. You rarely, if ever, sell the stocks in this bucket, and only do so when the business landscape radically changes for some reason. Ideal stocks in this bucket are medium-sized to smaller “big” companies that are slowly growing, gaining market share, and buying out their competitors. Small companies and gigantic companies are avoided.

Most guys doing this are purchasing American companies. I understand the reasoning behind this, but for many reasons I’ve stated in the past, I think owning American stocks for the long haul is a very bad idea based on where America is going. I own plenty of stocks myself, both as real stock and as ETFs, but 100% of these are non-American companies. (The closest things I have to an American stock are a few Canadian cannabis stocks.)

Are there times to own American stocks in my opinion? Sure. That’s if you’re speculating or holding stocks for the short to medium term and you really, really know what you’re doing. Beyond that, I wouldn’t be comfortable holding American stocks. I might be an extremist when it comes to this viewpoint, so as always, do your own research and make your own decisions.

The last of the five buckets is the short-term stock bucket. This is where you speculate, buying risky stocks that you think are going to go crazy and where you can make a lot of money. These would be things like stocks that have recently gone public and so on.

As I’ve said many times, speculating is fine, but you should only do it with money you can afford to lose because you can indeed lose big. You should also be careful about how big this bucket is in relation to your overall portfolio. Generally speaking, the older you are, the more kids you have (or plan to have), the more financially conservative you are, the more your monthly lifestyle costs are, and the worse your financial condition is, the smaller your overall speculation bucket should be based on the size of the rest of your portfolio.

Beyond that, there are no hard and fast rules for the size of each bucket in terms of the percentage of assets within each bucket at any given time. As usual for multiple bucket strategies, there are times where some buckets will explode in value as compared to others. That’s fine, as long as you rebalance every once in a while based on what makes sense (you would usually not want to sell a bunch of real estate all at once) and your long-term goals.

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  • American
    Posted at 11:09 am, 7th April 2019

    Interesting idea.

  • Phero
    Posted at 02:10 pm, 9th April 2019

    Educative……worth looking into.

    What would you do Caleb if you suddenly found yourself in a third world country, with no money, no contacts, no job and massive debt. What are the first five steps you would take to get yourself on the way forward?

  • Caleb Jones
    Posted at 07:52 pm, 9th April 2019

    What would you do Caleb if you suddenly found yourself in a third world country, with no money, no contacts, no job and massive debt. What are the first five steps you would take to get yourself on the way forward?

    I don’t do fantasy hypotheticals. (Why would one be in massive debt if living in a third world country, as just one example?)

  • Phero
    Posted at 02:33 am, 10th April 2019

    Bad loan – invests in a business that doesn’t work out. Could happen anywhere couldn’t it?

  • Caleb Jones
    Posted at 07:56 am, 10th April 2019

    I may answer a variation of your question in a future article because I get similar questions, but not your question as stated; it’s way too out there.

  • pua
    Posted at 11:31 am, 10th April 2019

    Off topic:
    you said:

    Dan Kennedy is the second greatest living marketing mind in the world. (The first greatest is Jay Abraham. The all time greatest is Gary Halbert, but he’s dead. I need to write a blog post about that guy someday…he was a real character.)

    Can you write an article about Gary Halbert,or Dan or Jay?

  • Bluegreen
    Posted at 04:23 pm, 10th April 2019

    Curious what folks think about gold versus silver vs platinum?


  • Caleb Jones
    Posted at 09:35 pm, 10th April 2019

    Can you write an article about Gary Halbert,or Dan or Jay?

    Eventually, yes.

    Curious what folks think about gold versus silver vs platinum?

    Gold is a hedge. Silver and platinum are investments. Good ones too.

  • Herr Bert
    Posted at 04:33 am, 15th April 2019

    I’m not sure whether I understand the concept correctly:
    are the 5 buckets supposed to remain the same size relative to each other, so you add to the one that is currently filled “below level” (ie rule-based rebalancing)?
    Or is there some sort of market timing, alpha strategy involved?

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