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Harold Evensky

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Harold Evensky’s 2 Investing Strategies That Can Help Clients Now

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Harold Evensky, 80, long saluted as “The Dean of Financial Planning,” created at least two well-known and widely adopted investing strategies.

One of the two is “not something to make money from. It’s to protect people from panic selling; [the other] is to provide a somewhat better return and is particularly helpful in a volatile market,” he tells ThinkAdvisor in an interview.

The founder of Evensky & Katz/Foldes Wealth Management explains both strategies, speaking by phone from a cruise ship in the North Atlantic.

He calls his bucket approach, which he created in 1985, “a very inexpensive behavioral insurance policy.”

The other investing methodology, his “core-and-satellite” strategy, comprises two different types of investments and can capitalize on market volatility, when there are “more interesting potential opportunities out there,” he notes.

Evensky and wife Deena Katz Evensky, who merged her own planning practice with Harold’s in 1990, are both now retired and consultants to the Miami-based firm. Harold continues with speaking engagements and participating in seminars.

In 2014, Foldes Financial Management, led by Steven Foldes, merged with the Evenskys’ practice.

Harold started his career at Bache & Co. in 1967, moved to Drexel Burnham Lambert and, in 1985, went independent.

ThinkAdvisor recently interviewed the retired professor of practice of the Texas Tech University Personal Financial Planning Department while the Evenskys were aboard a ship celebrating their 34th anniversary (with “a really nice dinner and a really great bottle of wine”).

About bucketing, Harold — who, by the way, is also known as “The Father of the Bucket Strategy” — says: “In the event of a disastrous market, if you have the bucket approach in place, you don’t have to sell from your investment bucket and worry about where the grocery money is coming from.”

Here are highlights of our interview:

THINKADVISOR: In 1985, you created the bucket strategy to protect assets. Because of stock market volatility and serious talk of a recession on the way, is it particularly effective now?

HAROLD EVENSKY: Yes. It’s a very, very inexpensive behavioral insurance policy. The power of the bucket approach is behavioral.

We had it in place in 1987 [on Black Monday] when it looked like the world was coming to an end. We had it in place during the Great Recession.

It’s not something to make more money from. It’s to protect people from panic selling.

It’s strictly about: When things are bad, you don’t feel forced to sell at big losses.

But it’s not because you anticipate something. It’s because at some point, markets are [going to be] volatile, and it’s likely to be a jittery time.

If you have the bucket approach in place, then you don’t have to worry about where the grocery money is coming from.

How many buckets do you recommend clients have?

My [strategy] has just two buckets; other [advisors] have more because [firms] think it’s a good sales piece.

But the more complex you make it, the more it’s going to cost, and the harder it is. I’m not a big believer in the complex.

Please elaborate on what your approach entails.

The idea is to determine what your necessary cash flow needs are for important items for a year. That doesn’t mean a cruise; it means things like a mortgage, insurance payments and basic needs.

Offset that against whatever outside income you have, such as Social Security. Whatever that number is, you set aside one year of it in what I call the cash bucket.

Any money you’re going to need in the next five years, you shouldn’t be investing. You should keep that very liquid. That’s the idea of the cash bucket.

The power of this cash-flow reserve is behavioral. People who use it won’t get panicky.

What else can you use the cash bucket for?

Say you’re rebalancing your investment portfolio: If your stocks are way down and bonds are flat, and you need to sell some bonds and buy stocks to bring it back to your investment policy, you can take a portion from your cash bucket.

But that cash bucket lasts for many, many years without people having to touch it.

What’s the second bucket for?

That’s the investment bucket. The balance of all your assets goes there.

In the event of a disastrous market, you don’t want to have to sell from your investment bucket.

So you arrange with a [brokerage firm] to send you a check every month for whatever amount you set.

That way, you know where your money is coming from to keep groceries on the table in the event that things are really bad.

What’s the downside to the bucket approach?

There’s an opportunity cost to having some money in cash, which means it’s not earning a market return. That’s about the only downside.

Not long after you created the bucket methodology, you came up with your “core-and-satellite” strategy. Please explain it.

The main purpose is to provide a somewhat better return. And it lowers risk.

The core, largely fixed income, is to capture market returns, and it doesn’t change very often. The satellite investments are mostly exchange-traded funds and change a little more frequently than the core.

Right now, most of our satellite investments are in ETFs. But they can be in anything.

Is the core-and-satellite strategy effective for retirement planning?

Absolutely. It’s good for any investing and particularly helpful in a volatile market, when there are more interesting potential opportunities out there.

But it’s not a guarantee. However, the more volatility and changes, the more satellite opportunities.

In 2015, you did an about-face and said you were in favor of certain types of annuities — immediate and longevity annuities. What do you think of annuities now?

They’re something that investors should be looking at. The main problem with annuities is that the pricing isn’t very reasonable for many products.

But there’s definitely much more product out there now that’s reasonably priced. There are more and more very low-cost annuities.

What’s your forecast for the stock market, and do you think there’s going to be a recession this year?

I’ve got opinions, but I don’t base investment decisions on them. I base those on long-term market expectations — that returns on stocks will be better than returns on bonds and that over time they’ll both be going up.

How is the investment policy determined at Evensky & Katz/Foldes Wealth Management?

We’re not selling the [idea] that we’re going to beat the market. We’re financial planners: Our goal is to help our clients achieve their goals with reasonable expectations.

The investment committee determines the investment policy. Individual advisors don’t do unique things for their clients’ portfolio; they follow the firm’s investment policy.

It’s not like an advisor would say, “I think this client ought to have this investment or that one.” The investments are determined by the investment committee, and all the wealth managers follow that policy.

You’ve been dubbed “The Father of the Bucket Strategy” and “The Dean of Financial Planning.” Which title do you like better?

[Laughs] They’re both very impressive. But as the saying goes, I still put my pants on one leg at a time.

Pictured: Harold Evensky


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