'Lazy Portfolios' 1Q update (still winners!)

PAUL B. FARRELL

'Lazy Portfolios' 1Q update (still winners!)

And beating the S&P 500 for passive investors, advisers and pros

By Paul B. Farrell, MarketWatch

Last Update: 10:35 AM ET Apr 10, 2007

ARROYO GRANDE, Calif. (MarketWatch) -- Welcome to the new 1st quarter update of the lazy portfolios. And guess what: They're still boring ... and still beating the S&P 500, with no timing and no trading necessary.

Who's interested in the lazy portfolios? Recent e-mails suggest that although we initially thought lazy portfolios were mainly for passive do-it-yourself Main Street investors, as time passed we've discovered that this strategy is actually working for three different kinds of investors:

1. Passive investors: the vast majority of America's 95 million investors
2. Financial advisers and wealth managers helping high-net-worth folks
3. Financial industry pros investing the passive portion of their assets

So whichever group you fit in, come join the club, you're a perfect candidate for one of these lazy portfolios. Or we invite you to create your own modified version.

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And by the way, if you haven't figured it out by now from reading about lazy portfolios the past several years we've been updating them, lazy investing is nothing more than the good old MPT (Modern Portfolio Theory) in action: Simple well-diversified portfolios of three to 11 low-cost, no-load index funds. Solid long-term asset allocations with no active trading.

Warning: Brokers hate this Nobel Prize-winning strategy because they can't get rich on index funds. But the truth is, once you're in the club, you can ignore the other 14,000 funds out there, they're unnecessary.

So how are the lazy portfolios doing? Same dull, boring results: Still beating the S&P 500! Morningstar tallied the results for us again. The Aronson Family Portfolio was the three- and five-year winner, and the "Second Grader's Lazy 'Starter' Portfolio" nudged out the "Yale U Portfolio" on a one-year basis (thanks to having just 10% in fixed-income compared to 20% to 40% for the others). Here are all the facts, folks:

Aronson Family Portfolio: 11 funds

Ted Aronson heads up AJO Partners, managers of $29 billion, no retail funds for the public, just institutional retirement money. I first ran across Ted in a Barron's interview. He's one of the rare managers who's honest enough to tell you where his own money is invested. "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." And he's beating the S&P 500 on a 1-, 3- and 5-year annualized basis with 40% in domestic, 40% in international and 20% in fixed income. And he's sticking with these allocations for the near future.

Fund	Allocation	1-year return	3-year annualized return	5-year annualized return
Vanguard 500 Index VFINX	15%	11.67%	9.91%	6.14%
Vanguard Emerging Markets Stock Index VEIEX	20%	18.88	26.86	23.82
Vanguard European Stock Index VEURX	5%	25.65	22.09	15.85
Vanguard Extended Market Index VEXMX	10%	8.48	13.76	12.46
Vanguard High-Yield Corporate VWEHX	5%	9.01	6.60	7.77
Vanguard Inflation-Protected Securities VIPSX	10%	5.08	2.85	7.22
Vanguard Long-Term U.S. Treasury VUSTX	5%	6.40	3.68	7.36
Vanguard Pacific Stock Index VPACX	15%	9.78	14.77	15.62
Vanguard Small Cap Growth VISGX	5%	3.73	11.80	11.57
Vanguard Small Cap Value Index VISVX	5%	9.54	14.16	11.19
Vanguard Total Stock Market Index VTSMX	5%	11.10	10.81	7.50
Total portfolio	100%	11.62	14.19	13.06
S&P 500 Index	100%	11.83	10.06	6.27

No-Brainer Portfolio: 9 funds

Dr. William Bernstein is the author of the Intelligent Asset Allocator as well as a physician, neurologist and financial adviser. I first saw this portfolio seven years ago in his SmartMoney column. And "No-Brainer" is soundly beating the S&P 500's five-year averages plus running neck and neck on a one- and three-year basis.

Fund	Allocation	1-year return	3-year annualized return	5-year annualized return
Vanguard Emerging Markets Stock Index	5%	18.88%	26.86%	23.82%
Vanguard European Stock Index	5%	25.65	22.09	15.85
Vanguard Pacific Stock Index	5%	9.78	14.77	15.62
Vanguard REIT Index VGSIX	5%	21.66	22.28	21.62
Vanguard Short-Term Investment Grade Index VFSTX	40%	6.08	3.10	4.00
Vanguard Small Cap Index NAESX	5%	6.70	13.07	11.54
Vanguard Small Cap Value Index	10%	9.54	14.16	11.19
Vanguard Total Stock Market Index	15%	11.10	10.81	7.50
Vanguard Value Index VIVAX	10%	17.06	14.22	9.45
Total portfolio	100%	10.89	10.65	9.21
S&P 500 Index	100%	11.83	10.06	6.27

Coffeehouse Portfolio: 7 funds

Bill Schultheis is a former Smith Barney broker and author of "The Coffeehouse Investor." Bill launched his portfolio in 1999 when Wall Street was betting heavy on tech and dot-coms. They laughed at his 40% bond allocation. But nobody laughed during the bear market of 2000-2002 when his lazy portfolio was beating the S&P 500 by 15 percentage points all three years. And it's so simple: You put 40% in an intermediate bond index and 10% in each of the six stock funds; so it wins in bull and bear markets.

Fund	Allocation	1-year return	3-year annualized return	5-year annualized return
Vanguard 500 Index	10%	11.67%	9.91%	6.14%
Vanguard REIT Index	10%	21.66	22.28	21.62
Vanguard Small Cap Index	10%	6.70	13.07	11.54
Vanguard Small Cap Value Index	10%	9.54	14.16	11.19
Vanguard Total Bond Market Index VBMFX	40%	6.45	3.17	4.87
Vanguard Total International Stock Index VGTSX	10%	20.14	20.64	16.56
Vanguard Value Index	10%	17.06	14.22	9.45
Total portfolio	100%	11.26	10.70	9.60
S&P 500 Index	100%	11.83	10.06	6.27

Yale University Lazy Portfolio: 5 funds

David Swensen's the manager of Yale University's endowment fund and author of "Unconventional Success," a must-read book. He's had incredible returns of roughly 16% annually for two decades! However, he warns that institutional managers like him have many advantages unavailable to America's 94 million Main Street investors. His five-fund lazy portfolio is a solid winner, beating the S&P 500 across the board.

Fund	Allocation	1-year return	3-year annualized return	5-year annualized return
Vanguard Inflation-Protected Securities	15%	5.08%	2.85%	7.22%
Vanguard REIT Index	20%	21.66	22.28	21.62
Vanguard Short-Term Treasury Index VFISX	15%	5.02	2.25	3.60
Vanguard Total International Stock Index	20%	20.14	20.64	16.56
Vanguard Total Stock Market Index	30%	11.10	10.81	7.50
Total portfolio	100%	13.21	12.59	11.51
S&P 500 Index	100%	11.83	10.06	6.27

Margaritaville Portfolio: 3 funds

Scott Burns is a popular Dallas Morning News financial columnist and co-author of the best-selling "Coming Generational Storm." He started developing lazy portfolios 15 years ago. His Margaritaville Portfolio is simple. And it's beating the S&P 500 in all three time periods.

Fund	Allocation	1-year return	3-year annualized return	5-year annualized return
Vanguard Inflation-Protected Securities	33.3%	5.08%	2.85%	7.22%
Vanguard Total International Stock Index	33.3%	20.14	20.64	16.56
Vanguard Total Stock Market Index	33.3%	11.10	10.81	7.50
Total portfolio	100%	11.99	11.32	10.32
S&P 500 Index	100%	11.83	10.06	6.27

Second-Grader's 'Starter' Portfolio: 3 funds

Here's a new lazy portfolio we just reviewed a couple months ago. See previous Paul B. Farrell.

Kevin Roth is an 8-year-old second-grader. He got a gift from grandma and a few hints from his father, Allan, a financial planner in Colorado Springs. It's a simple portfolio with just 10% in bonds, perfect for someone with a long time horizon and higher risk tolerance.

Fund	Allocation	1-year return	5-year annualized return	10-year annualized return
Vanguard Total Stock Market Index	60%	11.10%	10.81%	7.50%
Vanguard Total International Stock Index	30%	20.14	20.64	16.56
Vanguard Total Bond Market Index	10%	6.45	3.17	4.87
Portfolio	100%	13.35	13.00	9.96
S&P 500 Index		11.83	10.06	6.27

Source for all figures: Morningstar Inc. data as of March 31.

Your choice

But, which one's best for you? Actually, any one of the seven is better than wasting time chasing hot stocks and the other 14,000 funds, the vast majority of which underperform the market every year. In the long run, any one of these portfolios is a better choice than virtually all other alternatives for passive investors.

Finally, it turns out that the lazy portfolios have gained enough readership that we're considering the possibility of making them a regular feature, with daily updates so you can come back and check out their performance anytime, not just quarterly.

Moreover, since we had an encouraging 98% favorable response last week regarding Prof. Siegel's ETF portfolio, we'll probably add it along with a traditional cap-weighted ETF portfolio for comparison to the mutual fund versions above. See previous Paul B. Farrell.