Post #23 – Portfolios For the Lazy Investor
In my last post, Post #22, I discussed how to construct a simple portfolio that is easy for anyone to implement and maintain. This post will be a short follow-on to my previous post to provide a resource for people who are so lazy they do not want to take the time to construct their own simple portfolio. For these lazy investors there is a solution.
Several investment advisors have constructed what are informally referred to as “Lazy Portfolios.” These are basic portfolios that have the widest applicability to the general public. If you do not want to develop your own portfolio or do not feel confident enough to do so, for the average retail investor, using one of these lazy portfolios would be perfectly adequate. In fact, I modeled my own retirement portfolio after one of these lazy portfolios for years during our asset accumulation phase.
The lazy portfolios are summarized on this page of the web site Marketwatch.com with their average 1-year, 3-year, 5-year, and 10-year annual returns. Also shown for comparison is the returns for the S&P 500 index for the same time periods. As you can see all 8 of the lazy portfolio’s 5-year and 10-year average annual returns are higher than the S&P 500 index returns. This is due to the fact the lazy portfolios each have a significant fixed income allocation and the S&P 500 index includes only stocks. Since the 10-year period from 2001 through 2010 was not a particularly good period for stocks, any portfolio, that maintained a fixed income component, performed better than virtually any 100% stock portfolio.
From 2000 through 2009, the average annual return for the S&P 500 index was 1.2%, essentially flat. Ten years is a long time to wait for stocks to recover. This time period illustrates why maintaining a significant fixed income allocation, not only reduces portfolio volatility, but it can also increase returns over long periods of time. Of course a 100% stock portfolio will always provide better returns over very long time periods, say 25 to 30 years. But the volatility along the way is usually too much for most investors to handle. It is better to maintain a healthy fixed income allocation in your portfolio to maintain portfolio stability and accept a slightly lower average return.
When you click on each of the 8 listed lazy portfolios to view their underlying funds, you will see that all of them are created using the Vanguard family of funds. This is because, as I wrote in a previous post, Vanguard has the lowest fund costs. However, most large brokerage firms have similar index funds that you can use to create these same portfolios.
Which lazy portfolio should you choose? It does not really matter. As I have said many times before, when it comes to your long term retirement financial assets, the most important decision is your chosen equity allocation. However, I will provide a couple practical tips on choosing a lazy portfolio.
The 8 portfolios are listed in descending order based on the number of funds in each portfolio. In other words the “Aronson Family Taxable” portfolio is constructed with 11 funds and the “Second Grader Starter” portfolio has only 3 funds. If you are just starting out investing or have a small retirement account balance, you should probably choose one of the lazy portfolios that are constructed with only 3 or 4 funds. There is a simple reason why.
Most brokerage houses charge what is called an account maintenance fee on their funds until they get to a certain value. For some companies it is only $3,000, but for others it is as high as $10,000. This fee is small usually between $5.00 and $20.00 per year, but it is charged for each fund below the firm’s minimum threshold. The maintenance fee is charged in addition to each fund’s management fee. When your account values are small, these maintenance fees detract from your return. You should check with your retirement account custodian to see at what value they drop these account maintenance fees.
When your retirement account balance gets larger, say over $100,000, I would probably choose one of the lazy portfolios that are constructed with 6 or 7 funds. If you are lucky enough to accumulate a portfolio of $500,000 or greater, I would consider one of the three portfolios that are constructed with 9 or more funds. The more funds in your portfolio, the more diversification you have, and, theoretically, the less volatility you will experience. Regardless of which portfolio you pick, it does not change your most important decision, selecting the appropriate overall equity allocation.
You do not have to use the exact individual fund allocations shown in each lazy portfolio. You can choose to use the same funds in a particular lazy portfolio, but change the percentage allocation of some or all of the funds used to create the portfolio. For example, if you like the 11 funds chosen to construct the “Aronson Family Taxable” portfolio, but are not comfortable having a 70% equity allocation, you can just dial back the equity allocation total by reducing the percentage in each of the 9 equity funds and adding the total percentage reductions to the 2 fixed income funds to make up the difference.
If you choose a lazy portfolio, select an appropriate overall equity allocation and re-balance your portfolio at least once per year. That is all you need to do manage your financial retirement assets. You do not need to pay an investment advisor; you do not need to buy esoteric specialty funds, and you do not need to watch the markets daily wondering whether you should buy or sell. You should concentrate most of your retirement related energy on increasing your income, lowering your living expenses, and putting as much money into your retirement accounts as you can.
Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.
Comments
No comments yet.
Sorry, the comment form is closed at this time.