In the previous post of the Investing series, we discovered the Three-Fund Portfolio and its variants. It is a simple portfolio made of only three funds. It is really simple to manage yet very effective and diversified. We also saw the two-fund and one-fund portfolio. They are even more simple and yet have many advantages. 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 rather in a class of stocks. In fact, there are many classes of stocks. It is important to know about the different classes to know in what your fund is investing in.
First of all, stocks are classified 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 $ market capitalization.
- Medium: Generally companies between 1 and 10 billions $ market capitalization.
- Small: Generally companies below 1 billion $ 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, stocks are also classified 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 rate.
- Value: The company is trading at a premium relative to their real value. People compute the real value in a different way. 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 a good 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.
After the three-fund portfolios, here is a four-fund portfolio. The Core Fund Portfolio, by Rick Ferri, is a very simple portfolio made of only four funds. It’s very close to a three-fund portfolio.
You can build 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
This 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, simply use the domestic stocks fund.
Bill Schultheis Coffeehouse Portfolio
The Coffeehouse portfolio was elaborated by Bill Schultheis, 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 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 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 it like this. You can still use this portfolio with less bonds if you want. Just keep the other funds at the same global proportion.
William Bernstein Coward’s Portfolio
The Coward’s Portfolio was elaborated by William Bernstein, 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 the domestic allocation. But mixes it with a fund for the domestic stock market. And several regions are forming the international allocation. Let’s look at the allocation:
- 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 feel that this portfolio is too complex. Splitting the international stocks into several different funds does not make sense for me. That means you are weighing 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.
Frank Armstrong Ideal Index Portfolio
The Ideal Index Portfolio was made by Frank Armstrong, the author of the Informed Investor. It 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 lower bond allocation. Here is the final allocation:
- 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. This may give it an edge. But will depend on the market.
David Swenson Lazy Portfolio
The Lazy Portfolio was elaborated by David Swenson, author of The Unconventional Success. It is simpler since it does not slice over different classes. The main difference with the previous portfolios is that there is two bond funds instead of one. It also uses a lot of Real Estate. Let’s look at its 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 the 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.
As you can see there are many different lazy portfolios. You now know five 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 the market capitalization, with a small domestic preference. Even though I may not advocate these portfolios, I think it is important to have a broad view of the possibilities when you are investing.
In the next post of the series, I cover Target Retirement Funds. They are funds of funds, specially tailored for retirement. This 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?