"Lazy portfolios" are those lovable low-cost well-diversified portfolios of eleven or less no-load funds that level out bull and bear markets. See previous Paul B. Farrell.
Hybrids are perfect for many investors: Newbie investors with little cash, back-to-school kids, newborn babies and wannabe hedgers. We've got 11 winners for you.
These lazy hybrids remind me of that old Greyhound bus jingle: "Take the bus and leave the driving to us." Similarly, hybrids do all the driving, tinkering and heavy lifting for you, all that headache buying, selling, trading and rebalancing. Their portfolios mix stocks and bonds. In bull market managers beef up stocks. In bears they downshift into bonds. You enjoy the ride.
Remember, hybrids are not only lazy, they're boring. So if your ego has a strong macho need to "feel the action" playing the market, forget hybrids, you need Nascar. But they're ideal for many investors in the slower lanes:
- Cheapo "starter" portfolio. Hybrids are so boring we tend to forget they exist in a world where every day we're assaulted by thousands of ads selling 18,000 funds, 8,000 stocks and 100,000-plus bonds. But they're great for newbies just starting out, like Norman who asked about starting a lazy portfolio. But with only $7,000, he couldn't even buy into the smallest four-fund lazy portfolio (each has a minimum initial investment of $3,000). So a hybrid makes a great starter miniportfolio.
- Back-to-school kids' lesson plan. Hey parents, you got kids going back to school. You're buying all kinds of clothes, books, supplies, a new computer. There's one thing they're probably not going to get in school: A course on investing! Schools are weak in training kids about money, economics and investing. So here are two essential lessons they probably won't learn for a couple decades: the power of compounding and the advantage of starting early. For example, if you start in your twenties, invest regularly in your IRA and 401(k) you'll retire a millionaire.
- Newborn baby's retirement gift. A 60-year-old reader told me that when he and his sisters were born back in the 1930s his grandparents bought $1,000 in mutual funds for each. Flash forward. The money was invested in different funds over the years, but thanks to 60 years compounding his account was worth $1.8 million. And when his older sister turned 65 she had almost $5 million, thanks to more aggressive investing.
- Poor man's hedge fund. Hedge funds make big headlines. But the truth is, they're a rich man's game and most have minimum investments of $250,000 to a $1 million, which knocks out the average investor whose portfolio averages less than $50,000. Worse yet, the vast majority of American investors can't even get into most hedge funds. Morningstar tells me there are 3,468 hedge funds in addition to their database of 18,833 mutual funds. Most aren't open to new investors, all but 468 have minimums over $25,000, and just 122 have minimums of $3,000 or less. So, most investors are cut out of the hedge fund market.
Hybrid mutual funds are perfect for Joe and Jane Main Street. But they wear lots of name tags, so they're like mislabeled merchandize! For example, the Morningstar hybrid category has more than 500 funds with a wide range of names: balanced, asset allocation, life-cycle, capital appreciation, growth-and-income, equity-income, fund-of-funds and even convertible bond funds. Here are 11 top picks to get you thinking:
Balanced funds
They have a fixed ratio, usually 60/40 stocks and bonds, more stocks in good times, more bonds in bad, and are constantly rebalanced to fit market conditions. The gold standard is Dodge & Cox Balanced (DODBX) , which typically outperforms the hedge fund index and the S&P 500. A no-load launched in 1931, the fund currently manages about $25 billion. Morningstar says its 10-year average annual return of 13.1% trounced the S&P 500's 8.8%. The fund is closed to new investors. So put them on your watch list, and pray they reopen.
Other popular balanced hybrids: Vanguard Wellington (VWELX) was launched in 1929 and is the largest, managing $41.5 billion. Ten-year returns are 11.1%. Fidelity Puritan (FPURX) has been around since 1947, manages $23.5 billion and has average 10.1% returns the past decade. Oakmark Equity-Income (OAKBX) manages $10.7 and its 10-year return of 13.8% is best among my picks.
Asset allocation funds
They have wider flexibility than balanced funds. Vanguard Asset Allocation Fund (VAAPX) manages $11.3 billion in assets and boasts 9.3% average annual returns. Fidelity Asset Manager (FASMX) was launched in 1988 and manages $9.2 billion with a 7.7% 10-year average return. TIAA-CREF Managed Allocation (TIMAX) is a relatively newcomer with just $535 million in assets, but its 4.7% five-year average return beat the S&P 500's 2.7%.
Life-cycle funds
These guys are the laziest of the laziest. You decide when you're going to retire, save regularly and park your money for decades. Over time these life-cycle funds tend to match or beat the broad market.
Life-style retirement funds usually come in sets of four. Fidelity has four Freedom Funds, designated 2010, 2020, 2030 and 2040, depending on when you plan to retire. For example, Fidelity Freedom 2040 (FFFFX ) has $4.2 billion and its 4.6% return the past five years beat the S&P 500's 2.8%. Vanguard's four life-cycle funds focus on risk: Income, Conservative Growth, Moderate Growth and Growth. Investors pick funds with less risk (and more bonds) as retirement approaches. For example, their Growth fund (VASGX) manages about $7.6 billion and its 10-year average is just under the S&P 500's.
Funds of funds
These hybrids invest in other funds rather than directly in stocks and bonds. There are two kinds. Large fund families have them investing in their own funds, such as Vanguard STAR (VGSTX) investing in nine other Vanguard funds. STAR has $12.8 billion in assets and its 10-year annual average of 9.4% beat the S&P 500. Another is T. Rowe Price Spectrum Growth (PRSGX) , a $3.0 billion fund with a 9.0% 10-year average. You only pay one layer of fees. In contrast, independent funds of funds invest outside their small fund families, adding a second layer of fees that result in lower returns.
Bottom line: Hybrids are a perfect choice for many, many investors. Best of all, these "lazy" one-fund miniportfolios help you beat the market with no rebalancing and put you on the path to retiring a millionaire!
