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Question Of The Month August, 2008
              Why Use A “Lazy” Investment “Portfolio”?
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Paul Farrell, a columnist for Marketwatch.com and author of Lazy Person’s Guide To Investing, has been telling us about the advantages of Lazy Portfolios using index funds.  He says that he wrote his book for “procrastinators, the financially challenged and everyone who worries about dealing with their money.”  Farrell says that most people think that if you want to make big money on Wall Street, you have to buy and sell the right stocks at the right time. 

 The “Lazy Portfolios” that Farrell writes about were developed by a number of individuals ranging from a Second Grade student to a portfolio developed by Ted Aronson, a professional who manages about $25 billion in institutional money  but prefers to keep his family money in his passive “Lazy Porfolio.”  Why not?  His passive portfolio has averaged an annual 16.37% return the past five years. 

 Farrell says “If you don't have a Lazy Portfolio, now is the time to build your own using the eight models below. And remember, back in the bad old days of the 2000-2002 bear-recession, one of them, the Coffeehouse, was killing the S&P 500 by 15 percentage points each of the three years -- more proof passive investing beats action.  You also don't need a lot of funds with this strategy. That's important if you're young, new at the game or just don't have a lot of money to invest.” 

 Here is Farrell’s comparison of the bottom lines of all eight Lazy Portfolios.

Portfolio

Equity %

No. of funds

1-year return

3-year annualized return

5-year annualized return

Second Grader's Starter

90

3

-2.67%

11.06%

13.18%

Aronson Family Taxable

80

11

2.77

13.83

16.37

Yale U's Unconventional

70

6

-0.35

9.96

12.54

Margaritaville

67

3

2.78

10.80

12.42

FundAdvice Ultimate Buy & Hold

60

11

2.02

10.66

12.44

Dr. Bernstein's No-Brainer

75

4

-2.79

9.58

11.74

Dr. Bernstein's Smart Money

60

9

-1.79

8.57

10.57

Coffeehouse

60

7

-2.57

7.66

10.09

S&P 500

100

n/a

-6.70

7.57

9.77

Source: Morningstar Inc. Data as of June 2.

Second grader's starter portfolio

Got less than $10,000? Start with a portfolio like Kevin Roth's three-funder. Kevin put his together as an eight-year-old second-grader. He takes a long view and has 90% in equities. He beat the S&P 500 with average 13.18% returns over last five years.

Fund

Allocation

1-year return

3-year annualized return

5-year annualized return

Vanguard Total Stock Market Index

60%

-6.34%

8.20%

10.74%

Vanguard Total International Stock Index

30%

1.64

19.11

21.21

Vanguard Total Bond Market Index

10%

6.40

4.08

3.67

Portfolio

100%

-2.67

11.06

13.18

Margaritaville portfolio

Scott Burns, a popular Dallas Morning News columnist, has a three-fund portfolio that also beat the S&P 500 with average five-year returns of 13.18%. Scott's Margaritaville portfolio has a third each in foreign equities, domestic equities and inflation-protected securities. Real simple, no timing, just rebalance annually.

Fund

Allocation

1-year return

3-year annualized return

5-year annualized return

Vanguard Inflation-Protected Securities

33.3%

13.04%

5.10%

5.31%

Vanguard Total International Stock Index VGTSX

33.3%

1.64

19.11

21.21

Vanguard Total Stock Market Index

33.3%

-6.34

8.20

10.74

Total portfolio

100%

2.78

10.80

12.42

Dr. Bernstein's No-Brainer portfolio

Paul has been tracking two portfolios from neurologist and financial adviser Dr. William Bernstein, author of "The Four Pillars of Investing," and the “Intelligent Asset Allocator”. Here's a four-fund portfolio from his EfficientFrontier.com Web site:

Fund

Allocation

1-year return

3-year annualized return

5-year annualized return

Vanguard 500 Index

25%

-6.78%

7.44%

9.63%

Vanguard European Stock Index

25%

-2.61

17.69

19.58

Vanguard Small Cap Index

25%

-8.16

9.10

14.08

Vanguard Total Bond Market Index

25%

6.40

4.08

3.67

Total Portfolio

100%

-2.79

9.58

11.74

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Yale U. Unconventional portfolio

David Swensen is the megasuccessful manager of the Yale Endowment Fund. His best selling book, "Unconventional Success," offered a six-fund portfolio. In spite of a heavy 20% in real estate, he's still beating the S&P 500, averaging over 12% the past five years.

Fund

Allocation

1-year return

3-year annualized return

5-year annualized return

Vanguard Inflation-Protected Securities

15%

13.04%

5.10%

5.31%

Vanguard REIT Index

20%

-12.37

10.54

16.94

Vanguard Long-Term Treasury Index

15%

9.00

3.49

3.72

Vanguard Emerging Markets Stock Index

5%

21.26

31.92

33.61

Vanguard Developed Markets Index

15%

-2.26

16.74

19.30

Vanguard Total Stock Market Index

30%

-6.34

8.20

10.74

Total portfolio

100%

-0.35

9.96

12.54

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Coffeehouse portfolio

Bill Schultheis was a long-time Smith Barney broker before becoming a financial adviser in the nineties. Jack Bogle, founder of the Vanguard Group mutual fund company, says that Schultheis "Coffeehouse Investor" is the No. 1 book he recommends to new investors. As with the Yale portfolio, the Coffeehouse Lazy portfolio was hurt by housing exposure. Still he's making a comeback and beating the S&P 500.

Fund

Allocation

1-year return

3-year annualized return

5-year annualized return

Vanguard 500 Index

10%

-6.78%

7.44%

9.63%

Vanguard REIT Index

10%

-12.37

10.54

16.94

Vanguard Small Cap Index

10%

-8.16

9.10

14.08

Vanguard Small Cap Value Index

10%

-12.27

6.86

13.41

Vanguard Total Bond Market Index

40%

6.40

4.08

3.67

Vanguard Total International Stock Index

10%

1.64

19.11

21.21

Vanguard Value Index

10%

-13.33

7.20

10.95

Total portfolio

100%

-2.57

7.66

10.09

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Dr. Bernstein's Smart Money portfolio

Here's Bernstein's nine-fund portfolio, first seen in his Smart Money column years ago. It's still a winner. His investment strategy totally reflects his long-term perspective on life, his practice and his writings, especially his fascinating new book about the history and impact of global commerce, "A Splendid Exchange: How Trade Shaped the World." And, yes, his passive portfolio regularly outperforms the market.

Fund

Allocation

1-year return

3-year annualized return

5-year annualized return

Vanguard Emerging Markets Stock Index

5%

21.26%

31.92%

33.61%

Vanguard European Stock Index

5%

-2.61

17.69

19.58

Vanguard Pacific Stock Index

5%

-1.47

14.80

18.95

Vanguard REIT Index

5%

-12.37

10.54

16.94

Vanguard Short-Term Investment Grade Index VFSTX

40%

4.72

4.32

3.41

Vanguard Small Cap Index

5%

-8.16

9.10

14.08

Vanguard Small Cap Value Index

10%

-12.27

6.86

13.41

Vanguard Total Stock Market Index

15%

-6.34

8.20

10.74

Vanguard Value Index

10%

-13.33

7.20

10.95

Total portfolio

100%

-1.79

8.57

10.57

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Aronson Family's Taxable portfolio

Ted Aronson's AJO Partners manages $25 billion in institutional assets. He's one of America's rare money managers who is honest enough to tell you where his own family's money is invested. It's worth him bragging about, averaging a hot-hand 16.37% for his 11-fund portfolio the past five years compared with just 9.77% for the S&P 500.

Fund

Allocation

1-year return

3-year annualized return

5-year annualized return

Vanguard 500 Index VFINX

15%

-6.78%

7.44%

9.63%

Vanguard Emerging Markets Stock Index VEIEX

20%

21.26

31.92

33.61

Vanguard European Stock Index VEURX

5%

-2.61

17.69

19.58

Vanguard Extended Market Index VEXMX

10%

-6.46

10.02

14.34

Vanguard High-Yield Corporate VWEHX

5%

-1.73

4.55

5.96

Vanguard Inflation-Protected Securities VIPSX

10%

13.04

5.10

5.31

Vanguard Long-Term U.S. Treasury VUSTX

5%

9.00

3.49

3.72

Vanguard Pacific Stock Index VPACX

15%

-1.47

14.80

18.95

Vanguard Small Cap Growth VISGX

5%

-4.11

11.17

14.53

Vanguard Small Cap Value Index VISVX

5%

-12.27

6.86

13.41

Vanguard Total Stock Market Index VTSMX

5%

-6.34

8.20

10.74

Total portfolio

100%

2.77

13.83

16.37

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FundAdvice.com's Ultimate Buy and Hold portfolio

The FundAdvice.com's 11-fund Ultimate Buy and Hold portfolio has also been beating the S&P 500 across the board, generating returns over 12% on a five-year basis. And doing it with a 60/40 asset allocation, equities to fixed income.

Fund

Allocation

1-year return

3-year annualized return

5-year annualized return

Vanguard 500 Index

6%

-6.78%

7.44%

9.63%

Vanguard Value Index

6%

-13.33

7.20

10.95

Vanguard Small Cap Index

6%

-8.16

9.10

14.08

Vanguard Small Cap Value Index

6%

-12.27

6.86

13.41

Vanguard REIT Index

6%

-12.37

10.54

16.94

Vanguard Emerging Markets Stock Index

6%

21.26

31.92

33.61

Vanguard Developed Markets Index

12%

-2.26

16.74

19.30

Vanguard International Value

12%

0.57

19.21

22.09

Vanguard Short-term Treasury

12%

8.05

4.73

3.27

Vanguard Intermediate-term Treasury

20%

10.54

4.92

3.68

Vanguard Inflation-Protected Securities

8%

13.04

5.10

5.31

Total Portfolio

100%

2.02

10.66

12.44

 Farrell says “If you're one of America's 95 million passive investors worried about the economy and the markets sinking further in 2008  and perhaps a bigger meltdown coming sometime around 2011-2012 before the end of the next presidential term ... and if you're worried about a decade-long stagflation ... forget market timing and active trading, you'll lose money. Preserve your capital.

If you want long-term results, build your own balanced portfolio.”  If you’re interested in a more detailed analysis of how the "Lazy Portfolios" work, take a look at his " Lazy Person's Guide to Investing." End of Story

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