There is a question that sounds simple but changes everything: what is this money for?
Most investment discussions skip this question. They jump straight to returns, asset classes, and performance charts. But returns without purpose are just numbers. A portfolio that beats the market by 2% is meaningless if it cannot pay for the thing it was meant to pay for, when it needs to be paid for.
Goals-first investing reverses the usual order. It starts with the purpose of the money, works backward to the time horizon, and only then considers what kind of assets might be appropriate. It treats money not as a single pool to be optimised, but as a collection of separate buckets, each with its own job to do.
This is not a new idea. But it is frequently ignored, and the consequences of ignoring it are predictable and painful.
This article explains why goals-first thinking matters, how bucket strategies work, why short-term money and volatility are a dangerous combination, and what the evidence says about matching time horizons to risk.
This is general educational information, not personal financial advice.
The Problem with Thinking in Aggregates#
Traditional portfolio theory treats all of an investor's money as a single pool. The goal is to maximise returns for a given level of risk, or minimise risk for a given level of returns. This framework, known as Modern Portfolio Theory, was developed by Harry Markowitz in the 1950s and remains influential today.¹
But there is a problem: people do not actually think this way.
When someone saves for a house deposit, they are not thinking about optimising their overall wealth. They are thinking about whether they will have enough money to buy a house in three years. When someone saves for retirement, they are not thinking about risk-adjusted returns. They are thinking about whether they will be able to stop working and live comfortably.
This mismatch between theory and psychology has real consequences. Investors often take too much risk with money they need soon, because they are chasing higher returns. Or they take too little risk with money they will not need for decades, because they cannot tolerate seeing fluctuations in their overall balance.
Goals-first investing addresses this by separating money into distinct buckets, each aligned with a specific purpose and time horizon. It does not change the underlying mathematics of investing. But it changes the framing, and the framing changes behaviour.
What Goals-First Investing Looks Like#
The core idea is simple: before deciding how to invest, decide what the money is for and when you will need it.
A typical structure divides money into three buckets based on time horizon:
Short-term bucket (1-3 years): Money needed soon for known or likely expenses. This might include an emergency buffer, planned purchases, or living expenses in early retirement. The priority is capital preservation and liquidity. Returns are secondary.
Medium-term bucket (3-10 years): Money for goals that are not immediate but are on the horizon. This might include a house deposit in five years, a child's education, or a career transition. The priority is modest growth with controlled volatility. Some fluctuation is acceptable, but large drawdowns are not.
Long-term bucket (10+ years): Money that will not be touched for a decade or more. This might include retirement savings for someone in their thirties or forties, or wealth intended for the next generation. The priority is growth. Short-term volatility matters less because time provides room for recovery.
This structure is not rigid. Some goals do not fit neatly into one bucket. Some people have more than three goals, or goals with unusual characteristics. The point is not to follow a formula, but to ensure that every dollar has a purpose and that purpose informs the investment approach.
Why Time Horizon Matters So Much#
Time is the most important variable in investing, and it is often underweighted.
The reason is straightforward: volatility is less dangerous over long periods. If a portfolio falls 30% and you do not need the money for 20 years, you have time to recover. If a portfolio falls 30% and you need the money next year, you have a serious problem.
Historical data supports this. Looking at long-term stock market returns, the probability of a negative outcome decreases significantly as the holding period increases.² Over any single year, the chance of loss is meaningful. Over ten years, it is smaller. Over twenty or thirty years, it becomes rare (though not impossible).
This does not mean that long-term investors are guaranteed positive returns. It means that time reduces the impact of short-term volatility on eventual outcomes. The short-term noise averages out. The long-term trend (historically upward, though with no guarantees for the future) becomes more visible.
For short-term money, the calculation is entirely different. Volatility is not noise that can be waited out. It is a real risk that can destroy the ability to meet the goal. A house deposit that was $100,000 last year and is $70,000 this year is not a temporary paper loss. It is $30,000 that is no longer available for the house.
The Conflict Between Short Horizons and High Volatility#
One of the most common mistakes in investing is holding volatile assets for short-term goals.
The temptation is understandable. Cash and savings accounts offer low returns. Shares have historically offered higher returns. Why not put short-term money in shares and earn more?
The answer is that the "more" is not reliable over short periods. It is an average, not a guarantee. And the path to the average includes years of significant losses.
Consider someone saving for a house deposit in three years. They invest the money in a diversified share portfolio. Two years in, the market drops 25%. Now they have a choice:
- Buy a cheaper house or delay the purchase
- Sell at a loss and proceed with reduced funds
- Wait for recovery, hoping it happens before they need the money
None of these options are good. All of them were avoidable by matching the investment to the time horizon.
This problem is even more severe in retirement, where it is called sequence of returns risk.³ A retiree who experiences poor returns in the first few years of retirement, while simultaneously withdrawing money for living expenses, faces a compounding problem. The portfolio shrinks from both losses and withdrawals, leaving less capital to recover. Research shows that the first five years of retirement are especially critical. Bad luck during this period can permanently impair the portfolio's sustainability.³
The bucket approach addresses this by keeping short-term needs in stable assets. The retiree draws from the short-term bucket during downturns, leaving the long-term bucket untouched to recover. This does not eliminate risk, but it changes the timing of when risk is realised.
Mental Accounting: A Bias That Can Help#
Behavioural economists have long studied a phenomenon called mental accounting, first described by Richard Thaler.⁴ Mental accounting refers to the tendency to treat money differently depending on which "mental bucket" it belongs to, even though money is fungible (a dollar is a dollar, regardless of its label).
In many contexts, mental accounting leads to poor decisions. People spend a tax refund more freely than regular income, even though both are equally their money. People treat a windfall as "play money" and take risks they would not take with their salary.
But in goals-first investing, mental accounting can be an advantage.
When money is explicitly labelled for a purpose (the emergency fund, the house deposit, the retirement account), it feels different. Spending it on something else requires a conscious decision to violate the label. Investing it inappropriately feels wrong, because the purpose is clear.
This psychological friction is helpful. It makes it harder to take the emergency fund and gamble it on a hot stock tip. It makes it harder to raid the retirement account for a discretionary purchase. The mental separation creates protection.
Goals-first investing formalises this natural tendency. Instead of fighting mental accounting, it harnesses it. The buckets are real, not just psychological. Each one has its own purpose, its own time horizon, and its own appropriate level of risk.
What the Evidence Says#
The research on goals-based investing supports several key claims:
Goals-based approaches reduce harmful emotional reactions. Studies show that investors with clear goal structures are less likely to panic sell during downturns.⁵ When the short-term bucket is stable and the long-term bucket is explicitly designated for the long term, the pain of seeing paper losses in the growth bucket is reduced. The money is not needed now. The decline does not threaten the immediate goal.
Time horizon strongly influences appropriate asset allocation. Academic research confirms that longer holding periods justify higher allocations to volatile assets, while shorter periods do not.⁶ This is not just intuition. It reflects the mathematics of compounding, recovery time, and probability distributions.
Bucket strategies help manage sequence of returns risk. For retirees, research shows that maintaining a buffer of stable assets reduces the probability of portfolio depletion during adverse market conditions.³ The buffer allows withdrawals to continue without selling growth assets at depressed prices.
Complexity and costs must be managed. Critics of bucket strategies note that they can add complexity and transaction costs, especially if funds are frequently moved between buckets or if tax consequences are not considered.⁷ The benefits depend on implementation. A poorly designed bucket structure can create more problems than it solves.
The Questions That Define Each Bucket#
Assigning money to a bucket is not just about time. It requires clarity on several related questions:
What is this money for? A specific goal is better than a vague one. "Retirement" is less useful than "covering living expenses from age 65 to 75." "A house" is less useful than "a deposit of $150,000 for a purchase in 2028."
When will it be needed? This is the time horizon. It determines how much volatility the money can tolerate. The closer the need, the less tolerance for fluctuation.
How flexible is the timing? Some goals have hard deadlines (school fees are due in February). Others are flexible (retirement can be delayed if necessary). Flexibility increases capacity for volatility, because there is room to wait for recovery.
What happens if the goal is not met? Some failures are catastrophic (losing the emergency fund when an emergency happens). Others are disappointing but survivable (a smaller holiday budget). The severity of failure affects how much risk is appropriate.
Is partial success acceptable? Some goals are all-or-nothing (you either buy the house or you do not). Others can be scaled (a longer or shorter retirement, a more or less expensive car). Scalable goals allow more flexibility in investment approach.
These questions are uncomfortable because they require confronting uncertainty. But the uncertainty exists whether you confront it or not. Goals-first investing simply makes it explicit.
Practical Bucket Structures#
There is no single correct way to structure buckets. The right approach depends on individual circumstances. But some common patterns emerge:
The accumulation phase (pre-retirement): During the years of earning and saving, buckets might include:
- Emergency buffer (short-term): 3-6 months of expenses in cash or near-cash
- Near-term goals (short/medium-term): house deposit, car purchase, education costs
- Retirement (long-term): superannuation and other long-term investments
The decumulation phase (retirement): During the years of spending down savings, buckets might include:
- Immediate expenses (short-term): 1-3 years of living costs in stable assets
- Bridge funding (medium-term): 3-7 years of expenses in balanced investments
- Growth reserve (long-term): remaining assets in growth-oriented investments
The exact allocations depend on total wealth, income sources (such as pensions or government benefits), spending needs, and personal risk tolerance. The structure is a framework, not a prescription.
The Discipline of Refilling Buckets#
A bucket strategy is not a one-time exercise. It requires ongoing maintenance.
As short-term buckets are depleted (by spending or by goals being achieved), they need to be refilled from the medium-term bucket. As medium-term buckets are depleted, they need to be refilled from the long-term bucket.
The key discipline is refilling at the right time. Ideally, refilling happens after positive returns in the growth bucket, locking in gains and restoring the stable reserves. Refilling during a downturn defeats the purpose, because it converts paper losses into real losses.
This requires patience. During a prolonged downturn, the short-term bucket may run low before the long-term bucket recovers. Having enough in the short-term bucket to survive several bad years is essential. Skimping on the stable portion to maximise growth exposure can backfire badly.
What Buckets Cannot Do#
Bucket strategies are a tool for managing risk and aligning behaviour with goals. They are not a solution to all investment problems.
They do not eliminate market risk. The long-term bucket is still exposed to volatility. A prolonged bear market can still impair long-term outcomes, especially if withdrawals must be made during that period.
They do not guarantee success. A goal may still be missed if returns are poor, contributions are insufficient, or spending is higher than expected. Buckets improve the odds, not certainty.
They do not remove the need for decisions. When to refill, how to rebalance, what to hold in each bucket: these are still choices that require judgment. Poor implementation can undermine the strategy.
They do not work for everyone. Investors with very long horizons and no near-term needs may not benefit from a formal bucket structure. Investors with very limited assets may not have enough to meaningfully separate into buckets.
The value of buckets is in the clarity they provide and the behavioural guardrails they create. They are a framework for thinking, not a guarantee of outcomes.
The Deeper Point#
Beneath the mechanics of buckets is a more fundamental idea: investing is not an end in itself.
Money is a tool. It exists to fund the things that matter: security, freedom, experiences, obligations, legacy. When investing becomes disconnected from those purposes, it drifts into abstraction. Returns become a score to be maximised rather than a means to an end. Risk becomes a theoretical concept rather than a threat to something real.
Goals-first investing reconnects money to meaning. It asks not "how can I get the best returns?" but "how can I make sure this money does what I need it to do?" The difference in framing changes everything: the level of risk that feels appropriate, the emotional response to volatility, the decisions made under pressure.
This does not mean returns are unimportant. A portfolio that consistently underperforms may fail to fund its goals. But it means returns are evaluated in context. The question is not whether a portfolio beat the benchmark. The question is whether the money will be there when it is needed.
Summary#
Goals-first investing starts with purpose: what is the money for, and when is it needed? Money is divided into buckets based on time horizon: short-term (1-3 years), medium-term (3-10 years), and long-term (10+ years). Short-term money requires stability and liquidity; long-term money can tolerate volatility because time allows recovery. The conflict between short horizons and high volatility is one of the most common and costly mistakes in investing. Mental accounting, often a source of bias, becomes an advantage when buckets are clearly defined and labelled. Research supports goals-based approaches for reducing panic selling, managing sequence of returns risk, and aligning asset allocation with time horizon. Bucket structures require ongoing maintenance, especially the discipline of refilling at appropriate times. Buckets do not eliminate risk or guarantee success, but they provide a framework for thinking clearly about what money is for and how to protect that purpose.
Sources#
- Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x
- Dimson, E., Marsh, P., & Staunton, M. (2023). Credit Suisse Global Investment Returns Yearbook 2023. Credit Suisse Research Institute.
- Blanchett, D. M. (2007). Dynamic allocation strategies for distribution portfolios: Determining the optimal distribution glide path. Journal of Financial Planning, 20(12), 68-81.
- Thaler, R. H. (1985). Mental accounting and consumer choice. Marketing Science, 4(3), 199-214. https://doi.org/10.1287/mksc.4.3.199
- Brunel, J. L. P. (2015). Goals-Based Wealth Management: An Integrated and Practical Approach to Changing the Structure of Wealth Advisory Practices. Wiley.
- Siegel, J. J. (2014). Stocks for the Long Run (5th ed.). McGraw-Hill.
- Morningstar. (2024). The state of retirement income: Safe withdrawal rates. https://www.morningstar.com/lp/the-state-of-retirement-income