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Introduction to Lazy Portfolios

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Ever heard of the Margarita portfolio? How about the Couch Potato portfolio? Or the No-Brainer portfolio? No?

They’re all Lazy Portfolios.

A Lazy Portfolio is one that you can just set it and forget it and relies on low cost index funds or ETFs. There’s nothing particularly special about any Lazy Portfolio, besides their use of low cost index funds, and one isn’t necessarily better than another in all economic scenarios. As with any investing strategy, there are pros and cons. The pros, that it’s simple and you make few decisions, results in cons in that you may become complacent and ignorant of your investment decisions. It’s better to keep it simple and well understood than to make it complex and obfuscated. I’d rather make a choice that turned out wrong than make a decision I didn’t understand.

How They Perform

Paul Farrell of MarketWatch tracks eight Lazy Portfolios each year and in 2008, they have extended their winning streak of beating the S&P 500 for the sixth year (on a three-year and five-year basis). In other words, having a one of the eight Lazy Portfolios over the last six years has gotten you a better return than the stock market itself. (This year, three of the portolio’s got beat because they had a lot of REIT funds, but they are still besting the S&P over the last few years).

Here are the funds with the best names: (some of which weren’t featured in Paul Farrell’s wrapup)

Couch Potato Portfolio

This portfolio is the brainchild of Dallas Morning News columnist Scott Burns and is as simple as they come. All you need is 50% in the Vanguard 500 Index Fund (VFINX) and 50% in the Vanguard Total Bond Fund Index Fund (VBMFX). That’s it. You can go a little more aggressive with the variant Sophisticated Couch Potato Portfolio of 75% in the Vanguard 500 Index Fund and 25% in the Vanguard Total Bond Fund Index Fund.

Margaritaville Portfolio

This portfolio is also another one of Scott Burns’s creations and is the second simplest portfolio with equal parts of three funds: Vanguard Inflation-Protected Securities (VIPSX), Vanguard Total International Stock Index (VGTSX), and Vanguard Total Stock Market Index (VTI).

No-Brainer Portfolio

Created by Dr. William Bernstein, a neurologist known for his work in modern portfolio theory and his book The Four Pillars of Investing, the No-Brainer Portfolio consists of four funds of equal weight: Vanguard 500 Index (VFINX), Vanguard Small Cap (NAESX) or (VTMSX), Vanguard Total International (VGTSX) or (VTMGX), and Vanguard Total Bond (VBMFX) or (VBISX). There is also a No-Brainer Coward’s Portfolio that includes 9 funds.

Coffeehouse Portfolio

This little gem was created by money manager Bill Schultheis, author of The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life, created the Coffeehouse Portfolio that consists of seven funds:

  • 40% in Vanguard Total Bond Index (VBMFX)
  • 10% in Vanguard 500 Index (VFINX)
  • 10% in Vanguard Value Index (VIVAX)
  • 10% in Vanguard International Stock Index (VGTSX)
  • 10% in Vanguard REIT Index (VGSIX)
  • 10% in Vanguard Small-Cap Value Index (VISVX)
  • 10% in Vanguard Small-Cap Index (NAESX)

Those are the cooler sounding ones but there are many many others out there!

{ 11 comments, please add your thoughts now! }

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11 Responses to “Introduction to Lazy Portfolios”

  1. Dreamer says:

    I just heard an interview on the Sound Investing podcast by Paul Merriman (author of the “FundAdvice Ultimate Buy & Hold portfolio”, tracked on the same page) of the author of the “Second Grader’s Starter” portfolio, who is now in the 5th grade. That’s right. The author of the “Second Grader’s Starter” portfolio was an actual 2nd grader when he came up with it. 60% Vanguard total stock market index, 30% Vanguard total international index, 10% Vanguard total bond index. Invest in everything, and rebalance annually. Not my favorite allocation, but it’s simple, and it seems to work.

    And the kids getting an average of 17% annual returns. By the time he’s an adult, I don’t think he’s gonna have to worry to much about money.

  2. Jeremy says:

    What does Paul Farrell say when it comes to rebalancing? While they may be lazy in a sense they are easy to set up, they will surely become unbalanced over time. Does he suggest a regular rebalance period such as quarterly or annually, or does he suggest a rebalance when the allocation moves beyond a certain percentage threshold?

  3. tom says:

    Isn’t it interesting that all of the portfolios listed above are invested 100% in Vanguard?

    Even the portfolios by Scott Burns, whos firm invests solely in DFA funds.

  4. Anonymous says:

    PS… I hate it when portfolios are judged by the 1, 3, 5 year annualized returns. Those numbers are not great indicators of how well a portfolio is doing. I’ll wait 20 years, then we’ll see which one performed the best.

  5. jim says:

    Jeremy: Rebalance once a year.

    tom: For some portfolios, both Vanguard and Fidelity are listed and I just chose Vanguard because I didn’t want to look up a bunch of tickers. :) I’m not being paid by Vanguard (I should be!) but I am a big fan of them. To my knowledge, the Lazy Portfolio concept isn’t something pushed by Vanguard but I know what you’re getting at. It sounds like it could be a strong marketing idea that is being guerrilla marketed by Vanguard, but part of the reason for the Vanguard emphasis is because I have a bias and because I’m lazy.

  6. It is humorous but probably unfair to refer to some of these portfolios as “lazy” simply because they are designed to have “all weather” asset allocations. If you are a long term investor and have a portfolio that requires frequent changes in allocation (not just re-balancing), then perhaps those should be called “market timer” portfolios. Being a market timer in my book can be worse than being lazy. As for Scott Burns, his Asset Builder firm builds similar couch potato portfolios using DFA funds, which the regular investor can’t buy directly. For the rest of us, check out Scott’s “10 speed” portfolio which does a great job of combining non-correlated asset categories, with some commodity and currency exposure as well. Those are tracked on his site and have more current data than in the article you cited.

  7. tom says:

    Jim,

    Sorry, I wasn’t suggesting that you are trying to push Vanguard funds or that Vanguard was marketing these ideas. I was just pointing out that there are 0 crazy sector funds, 0 single stocks, 0 anything but Vanguard mutual and index funds. Even the investors who push funds for other companies, like Scott Burns and DFA, chose Vanguard for his portfolios. It all comes back to simple, low-fee formulas, and allocations = successful investing.

    BTW… I’m a HUGE fan and investor of Vanguard funds, so I am biased a bit…

  8. Wow, for a moment I thought I was reading Lazyman and Money’s blog. :-)
    I agree that 5 year returns are pretty much noise. But then we are constantly reminded that past performance is not an indication of future results, aren’t we?

  9. Shifterdog says:

    Paul Farrell claimed that “…all eight Lazy Portfolios are beating the benchmark S&P 500 by anywhere from three to 18 percentage points.”

    Technically, he is correct. But if you set aside the fixed portions of these portfolios, none beat the S&P 500 in 2008.

    These portfolios are actually balanced portfolios. Comparing balanced portfolios to an equity index is comparing apples to oranges.

  10. Eric says:

    Correct me if I’m wrong, but isn’t a Target Retirement Fund the mother of all lazy portfolio strategies?

    For example, the Vanguard Target Retirement 2045 Fund (VTIVX) invests in other Vanguard Funds. It currently has about 70% in a Total Stock Market Index Fund, 10% in a Total Bond Market Index Fund, and about 20% in various International Stock Funds.

    I assume these holdings are “rebalanced” very frequently by Vanguard without the investor having to lift a finger.

    The expense ratio of 0.18% seems reasonable, too.

    What’s the catch?

    • Jim says:

      Yes, Target Retirement funds are the mother of lazy portfolio strategies. If there is a catch, I haven’t seen it.


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