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We have already talked about the famous Three-Fund Portfolio and its variants. It is a simple portfolio made of only three funds. It is straightforward to manage yet very effective and diversified. We also saw the two-fund and one-fund portfolio. They are even more simple and, however, have many advantages. These two are called lazy portfolios. They are the most well-known lazy portfolios.
But there are more lazy portfolios that are available. People have proposed many more portfolios over the years. In this new post, I am going to cover more of these portfolios. They are called lazy portfolios because they are all using index funds. And you can kee the allocation of the different funds for many years.
Instead of choosing stocks, which is difficult, you choose stock funds or bond funds. You can either use mutual funds or Exchange Traded Funds (ETFs) depending on what you prefer and what you have access to.
Before we cover the different lazy portfolios, we have to cover something new. Many funds are not investing in all the stocks of an index. But instead, they are investing in a class of stocks. There are many classes of stocks. It is essential to know about the different classes to know in what your fund is investing in.
First of all, people classify stocks by size. The size of a company is its market capitalization. Companies are generally categorized with three different labels:
- Large: Generally, companies over 10 billion USD market capitalization.
- Medium: Generally, companies between 1 and 10 billion USD market capitalization.
- Small: Generally, companies below 1 billion USD capitalization.
I say “generally” because it may depend on the market. Large may not mean the same for the U.S. market than for the Swiss market. We do not have companies with one trillion dollar capitalization in Switzerland! Generally speaking, there is more volatility but more possibility of returns in the small caps. But this is not always true in every kind of market.
Then, people also classify stocks by style. There are two main styles:
- Growth: The company is growing at a quick rate and is expected to continue to grow at a fast pace.
- Value: The company is trading at a premium relative to its real value. People compute real value differently. It is generally based on profits, dividends, book values, and so on.
- Blend: The company is between both Growth and Value labels.
Some people are only investing in growth stocks, and some other investors are only choosing value stocks. Warren Buffet is an excellent example of a value investor.
And then, you can combine both labels to have something like small value or large blend. You will find many funds for each combination of these labels. And some lazy portfolios are based on these combinations.
1. Core-Four Portfolio
After the three-fund portfolios, here is a four-fund portfolio. The Core Fund Portfolio, by Rick Ferri, is a straightforward portfolio made of only four funds. It is very close to a three-fund portfolio.
You can build the Core-Four Portfolio like this:
- Domestic Bond Fund: Use your bond allocation
- Domestic Stock Fund: Use 50% of the remaining funds
- International Stock Fund: Use 40% of the remaining funds
- Real Estate Investment Trust (REIT) Fund: Use 10% of the remaining funds
It is the same as a three-fund portfolio with an added REIT fund. Compared to the three-fund portfolio, there is a preference for REIT. Even though the three-fund portfolio does not have REIT, they are included in the domestic stocks. If you want to give more importance to REIT, this fund is a good idea. If you prefer to consider REIT as their stock market capitalization weight, use the domestic stocks fund.
2. Coffeehouse Portfolio (Bill Schultheis)
Bill Schultheis is the author of The Coffeehouse portfolio. For reference, he is also the author of The Coffeehouse Investor. It is a bit different from the other portfolios we have seen so far. It uses a fixed allocation of 40% for bonds. The domestic allocation is sliced for each class. The international allocation is using a single fund.
Here is the full allocation of the Coffeehouse Portfolio:
- Large Blend stocks Fund: 10%
- Large Value Stocks Fund: 10%
- Small Blend Stocks Fund: 10%
- Small Value Stocks Fund: 10%
- International Stocks Fund: 10%
- REIT Fund: 10%
- Domestic Bonds: 40%
Compared to other lazy portfolios we have seen before, this one has a very low international allocation. And very high bond allocation. In my opinion, this is a very conservative portfolio. The bond allocation should move with time.
We should not set the bond allocation like this. You can still use this portfolio with a smaller allocation to bonds if you want. Just keep the other funds in the same global proportion.
Also, I think that seven funds are already too much to manage. It is starting not to be that lazy!
3. Coward’s Portfolio (William Bernstein)
William Bernstein elaborated The Coward’s Portfolio. He is the well-known author of The Intelligent Asset Allocator and The Four Pillars of Investing. This portfolio is even more complicated than the Coffeehouse. It also slices up domestic allocation. But it mixes it with a fund for the domestic stock market. And several regions are forming the international allocation.
Let’s look at the allocation of the Coward’s Portfolio:
- Domestic Stocks Fund: 15%
- Large Value Stocks Fund: 10%
- Small Blend Stocks Fund: 5%
- Small Value Stocks Fund: 5%
- Europe Stocks Fund: 5%
- Pacific Stocks Fund: 5%
- Emerging Markets Stocks Fund: 5%
- REIT Fund: 5%
- Short-Term Bond Fund: 40%
Again, this portfolio has low international allocation and high bond allocation. I also feel that the bond allocation is too high for most persons. I think that this portfolio is too complicated. Splitting the international stocks into several different funds does not make sense for me.
That means you weigh yourself the different regions instead of taking their market capitalization into account. And many allocations are too small, making it complicated to balance. Another difference is that the portfolio uses short-term bonds where most portfolio uses a mix of bond terms.
4. Ideal Index Portfolio (Frank Armstrong)
Frank Armstrong created The Ideal Index Portfolio. Frank Armstrong is the author of The Informed Investor. The Ideal Index Portfolio is quite similar to the Coward’s Portfolio. But it does not slice up the International Stocks and has more of it. And it has a lower bond allocation.
Here is the final allocation of the Ideal Index Portfolio:
- Large Blend Stocks Fund: 7%
- Large Value Stocks Fund: 9%
- Small Blend Stocks Fund: 6%
- Small Value Stocks Fund: 9%
- International Stocks Fund: 31%
- REIT Fund: 8%
- Short-Berm Bond Fund: 30%
I do not understand the numbers exactly.
Nevertheless, I think this portfolio makes more sense than the previous one. It has more international allocation and fewer bonds. There is a lot of small-capitalization stocks compared to the other ones. It may give it an edge. But it will depend on the market.
But, it is probably too complicated for most investors. Keeping such small allocations balanced will bring a lot of trouble. I would prefer fewer funds and higher allocations.
5. Lazy Portfolio (David Swenson)
David Swenson, the author of The Unconventional Success, designed the Lazy Portfolio. It is simpler since it does not slice over different classes. The main difference between the previous portfolios is that there are two bond funds instead of one. It also uses a lot of Real Estate.
Let’s look at the Lazy Portfolio allocation:
- Domestic Stocks: 30%
- International Developed Markets: 15%
- Emerging Markets: 10%
- Real Estate: 15%
- Domestic Treasury Bonds: 15%
- Domestic Treasury Inflation-Protected Securities: 15%
I like that this lazy portfolio does not slice over the different classes of stocks. But for me, there is too much Real Estate on this portfolio. I am not a huge fan of Real Estate. But this is only my opinion. And the difference in bonds is a bit complicated.
6. All-Weather Portfolio (Ray Dalio)
The All-Weather Portfolio is a portfolio introduced by the hedge fund manager Ray Dalio. The idea of this portfolio is to try to do well all the time. It is not a portfolio optimized for returns. But optimized to work during any financial time.
This particularity makes it very popular. Many people like the idea of having a portfolio that would do well during a bear market as well as during a bull market. This portfolio is a conservative portfolio that resonates with many people.
Here is the allocation of the All-Weather Portfolio:
- 40% Long-Term Bonds
- 30% Stocks
- 15% Intermediate-Term Bonds
- 7.5% Gold
- 7.5% Commodities
I like the fact that this lazy portfolio does well at all times. If you want maximum returns, this is not the best lazy portfolio. But, if you want a conservative portfolio that will weather most financial storms, this could be interesting for you.
Now, the problem with this portfolio is that it is very difficult to replicate in Switzerland or Europe. Bonds are currently yielding negative interest. So having such a significant allocation to bonds and so little stocks would prove difficult.
7. Golden Butterfly
Let’s finish with the Golden Butterfly Portfolio. This portfolio is designed to match the returns of the total stock market but significantly reduce the volatility. It is also a very popular portfolio these days.
Here is the allocation of the Golden Butterfly Portfolio:
- 20% Domestic Stocks
- 20% Small Cap Value Stocks
- 20% Long-Term Bonds
- 20% Short-Term Bonds
- 20% Gold
The Golden Butterfly is probably the portfolio that makes the most sense to me. I like the fact that it is evenly spliced and that there are no small allocations. It will be easy to rebalance such a portfolio. However, if you are not the United States, you will not be able to replicate it correctly.
For me, it is too conservative. The 40% allocation to bonds is too much for me. But I like the split into stocks and small-cap value stocks as well. And we have seen that adding gold to a portfolio can make a lot of sense.
As you can see, there are many different lazy portfolios.
You now know seven more lazy portfolios. And there are many more of them. However, I would not invest in them. But they may be interesting to some of you. I feel that they are too complicated for most investors. And most of them also have too many bonds. The bond allocation is something every investor should decide on. One should not set it in stone in a portfolio.
I am an advocate of simplicity in a portfolio. I think that your allocation should use weights based on market capitalization, with a small domestic preference. Even though I may not advocate these portfolios, I believe it is essential to have a broad view of the possibilities when you are investing.
Another issue with most of these lazy portfolios is that they are difficult to translate into European countries. Here, bonds are not as good as in the United States. It does not make a lot of sense to invest in negative bonds. Also, the stock market being tiny, we need higher international allocation.
In the next post of the series, I cover Target Retirement Funds. They are funds of funds, specially tailored for retirement. A Target Retirement Fund is even lazier than a lazy portfolio since you will only need to keep one fund.
What do you think of these portfolios? Do you follow any of them?