Lazy, Boring ... Portfolio Winners
Thursday, July 20, 2006
ARROYO GRANDE, Calif. — Dull, boring snoozers. Yep, that's our five "Lazy Portfolios!"
When I mention them to my buddies at the Pismo Beach Athletic Club they yawn and shake their heads: "Yeah lazy, but no fun!" My comeback: "If you want to gamble, go to Vegas — at least you'll enjoy Celine, Cats and Cirque du Soleil while losing your retirement nest egg. Remember, Wall Street's just another casino, where the house always wins." Goes in one ear, out the other.
But for the few that are listening, here's the score at halftime 2006: All five of our Lazy Portfolios are beating the S&P 500 on one-, three- and five-year averages, doing it with well-diversified mixes of 11 or less no-load, low-cost index funds.
And while their performance inevitably gets lost in the relentless daily assault of happy-talk propaganda from the Wall Street Casino's hype machine, the fact is that these simple portfolios are beating The Street through bull and bear markets!
But the trouble is, they really, really are so boring they're not "breaking news," so you rarely hear about them. Oh, maybe once or twice a year, but otherwise, "Lazy Portfolios" fit Nobel Economist Paul Samuelson's advice:"Investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas, although it is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office."
There are four main reasons why lazy portfolios are winners:
You save on rebalancing. You'll never need more than 11 mutual funds or ETFs. So forget the other 10,000 funds out there. You heard me, forget them!
You save on expenses. You only buy index funds. Never waste your heard-earned money on the extra, unnecessary fees charged by actively-managed funds.
You save on commissions. Also, you'll never again waste any of your hard-earned money on brokers' commissions for unnecessary, worthless and misleading advice. "Lazy Portfolios" are made up solely of no-load funds.
You save on trading costs. Forget about frequent rebalancing, market timing and active trading. Pure nonsense. Just create a well-diversified portfolio and stop tinkering. Remember Profs. Terrance Odean's and Brad Barber's famous research conclusion: "The more you trade, the less you earn." Extra taxes, fees and commissions will eat up your next egg.
Yes it's that easy, that simple, that lazy. Why? Because Lazy Portfolios are balanced asset-allocation strategies have proven to be solid performers in both bull markets and in bear markets, often beating the benchmark indexes by healthy margins.
So let's look at the five winners as of the end of the second quarter 2006, based on numbers provided by analyst Mark Komissarouk of Morningstar Inc. They're in reverse order ranked by size.
And before you e-mail and ask which one should you use, my advice is none. Create a portfolio that works for you using your gut instincts and common sense after getting a sense of what's going on with these five. After all, they're all beating the S&P 500 the lazy way.
And please, forget about guessing economic cycles and playing the market, you're just wasting your time and your retirement nest egg.
Aronson Family Portfolio: 11 funds
Ted Aronson heads up AJO Partners based in Philadelphia. They manage about $25 billion, all tax-exempt institutional retirement funds. (Sorry, no retail funds you can buy into). Of America's 75,000 money managers, Ted's one of the few honest ones; he actually discloses his own portfolio assets and allocations. The other 99.9 percent are too embarrassed to tell you, afraid their investors won't like what they see.
"All of my family's retirement money is in AJO funds," says Ted, "but because the fund trades a lot, it's not suitable for taxable investments. So all our family's taxable money is in Vanguard's no-load index funds," like all five Lazy Portfolios. His average 9.7 percent annual return beat the S&P 500 (2.5 percent) the past five years. In fact, all these portfolios handily beat the indexes.
| Fund | Allocation | 1-year return | 3-year annualized return | 5-year annualized return |
| Vanguard 500 Index | 15% | 8.51% | 11.07% | 2.38% |
| Vanguard Emerging Markets Stock Index | 20% | 33.26 | 34.08 | 20.35 |
| Vanguard European Stock Index | 5% | 24.95 | 23.28 | 10.43 |
| Vanguard Extended Market Index | 10% | 14.07 | 19.08 | 8.99 |
| Vanguard High-Yield Corporate | 5% | 3.01 | 6.13 | 6.29 |
| Vanguard Inflation-Protected Securities | 10% | -1.63 | 3.57 | 6.85 |
| Vanguard Long-Term U.S. Treasury | 5% | -6.13 | 1.59 | 6.37 |
| Vanguard Pacific Stock Index | 15% | 31.4 | 25.3 | 8.71 |
| Vanguard Small Cap Growth | 5% | 14.81 | 18.47 | 9.83 |
| Vanguard Small Cap Value Index | 5% | 12.64 | 20.92 | 11.02 |
| Vanguard Total Stock Market Index | 5% | 9.74 | 12.77 | 3.84 |
| Total portfolio | 100% | 16.83 | 18.69 | 9.7 |
| S&P 500 Index | 100% | 8.63 | 11.22 | 2.79 |
No-Brainer Portfolio: 9 funds
Dr. William Bernstein is a financial adviser to high-net-worth individuals and author of the "Intelligent Asset Allocator" and the "Four Pillars of Investing." He's also a physician and neurologist. I first saw the No-Brainer Portfolio in one of his Smart Money columns several years ago.
| Fund | Allocation | 1-year return | 3-year annualized return | 5-year annualized return |
| Vanguard Emerging Markets Stock Index | 5% | 33.26% | 34.08% | 20.35% |
| Vanguard European Stock Index | 5% | 24.95 | 23.28 | 10.43 |
| Vanguard Pacific Stock Index | 5% | 31.4 | 25.3 | 8.71 |
| Vanguard REIT Index | 5% | 19.23 | 25.60 | 18.93 |
| Vanguard Short-Term Investment Grade Index | 40% | 2.35 | 2.17 | 3.71 |
| Vanguard Small Cap Index | 5% | 13.79 | 19.76 | 8.97 |
| Vanguard Small Cap Value Index | 10% | 12.64 | 20.92 | 11.02 |
| Vanguard Total Stock Market Index | 15% | 9.74 | 12.77 | 3.84 |
| Vanguard Value Index | 10% | 12.34 | 15.18 | 4.39 |
| Total portfolio | 100% | 11.03 | 12.79 | 6.97 |
| S&P 500 Index | 100% | 8.63 | 11.22 | 2.79 |
Coffeehouse Portfolio: 7 funds
Here's one for the skeptics. This crash-preparation strategy is just seven low-cost, no-load index funds: Put 40 percent in the intermediate bond index and 10% in each of the 6 stock funds. Super-simple, zero rebalancing and it's a winner in bull and bear markets.
When everyone else was betting on tech and dot-coms in 1999, Bill Schultheis, a former Salomon Smith Barney broker and the author of "The Coffeehouse Investor," launched his Lazy Portfolio. Everyone laughed at his conservatism. But nobody laughed in the bear years of 2000-2002 when it was beating the S&P 500 by more than 15 percentage points every year.
| Fund | Allocation | 1-year return | 3-year annualized return | 5-year annualized return |
| Vanguard 500 Index | 10% | 8.51% | 11.07% | 2.38% |
| Vanguard REIT Index | 10% | 19.23 | 25.60 | 18.93 |
| Vanguard Small Cap Index | 10% | 13.79 | 19.76 | 8.97 |
| Vanguard Small Cap Value Index | 10% | 12.64 | 20.92 | 11.02 |
| Vanguard Total Bond Market Index | 40% | -1.04 | 1.90 | 4.40 |
| Vanguard Total International Stock Index | 10% | 27.60 | 24.93 | 10.89 |
| Vanguard Value Index | 10% | 12.34 | 15.18 | 4.39 |
| Total portfolio | 100% | 9.00 | 12.51 | 7.42 |
| S&P 500 Index | 100% | 8.63 | 11.22 | 2.79 |
Yale U. Lazy Portfolio: 5 funds
This one's from "Unconventional Success" by David Swensen, portfolio manager of Yale University's endowment fund, which has an incredible return of roughly 16 percent annually for the past two decades. Swensen notes that institutional managers like him have many advantages that will never be available to the vast majority of America's 95 million Main Street investors. But his five-fund portfolio is your best shot with retail funds. And again, all no-load index funds.
| Fund | Allocation | 1-year return | 3-year annualized return | 5-year annualized return |
| Vanguard Inflation-Protected Securities | 15% | -1.63 | 3.57 | 6.85 |
| Vanguard REIT Index | 20% | 19.23 | 25.60 | 18.93 |
| Vanguard Short-Term Treasury Index | 15% | 1.57 | 1.35 | 3.57 |
| Vanguard Total International Stock Index | 20% | 27.60 | 24.93 | 10.89 |
| Vanguard Total Stock Market Index | 30% | 9.74 | 12.77 | 3.84 |
| Total portfolio | 100% | 12.28 | 14.68 | 8.68 |
| S&P 500 Index | 100% | 8.63 | 11.22 | 2.79 |
Margaritaville Portfolio: 3 funds
Scott Burns, co-author of the bestselling "Coming Generational Storm" is a popular Dallas Morning News financial columnist. He developed his original "Couch Potato Portfolio" 15 years ago. Just two funds in a 75-25 mix or a more conservative 50-50 split between a stock and a bond index fund.
When the Couch Potato slipped in recent years he added the Margaritaville Portfolio: "One part total stock index, one part international stock index and one part inflation-protected Treasury securities. You can do this, at very low cost, with mutual funds and exchange-traded funds." Scott's still testing the portfolio, but there no "wastin' away searching for a lost shaker of salt" because the portfolio's also beating the S&P 500.
| Fund | Allocation | 1-year return | 3-year annualized return | 5-year annualized return |
| Vanguard Inflation-Protected Securities | 33.3% | -1.63 | 3.57 | 6.85 |
| Vanguard Total International Stock Index | 33.3% | 27.60 | 24.93 | 10.89 |
| Vanguard Total Stock Market Index | 33.3% | 9.74 | 12.77 | 3.84 |
| Total portfolio | 100% | 11.89 | 13.75 | 7.18 |
| S&P 500 Index | 100% | 8.63 | 11.22 | 2.79 |
Source for all tables: Morningstar Inc. All data as of June 30.
