Lazy portfolios

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Lazy portfolios are designed to perform well in most market conditions. Most contain a small number of low-cost funds that are easy to rebalance. They are "lazy" in that the investor can maintain the same asset allocation for an extended period of time, as they generally contain 30-40% bonds, suitable for most pre-retirement investors.

Two fund portfolio

It is possible to retain access to the broad US and International markets, as well as bonds, using only two funds. Rick Ferri has proposed a two-fund portfolio containing the total world stock market, and a diversified US bond market index fund as follows [1].

Rick Ferri's Two Fund Portfolio [1]
 % Allocation Fund Mutual Fund ETF Fund (ER)
Investor's (ER) Admiral's (ER)
40% Vanguard Total Bond Market Index Fund VBMFX (.20%) VBTLX (.08%) BND (.08%)
60% Vanguard Total World Stock Index Fund VTWSX (.30%) - VT (.18%)

Three fund lazy portfolios

There are a number of popular authors and columnists who have suggested 3 fund lazy portfolios. These typically consist of three equal parts of bonds (total bond market or TIPS), total US market and total international market.

In addition, consider that there are several close alternatives to these funds, especially when purchasing through vanguard. For example, consider that the "Vanguard Inflation-Protected Securities Fund" also has a short term alternative, "Vanguard Short-Term Inflation-Protected Securities Index Fund" (tickers VTIPX or VTAPX) which can offer slightly less volatility in NAV.

Note that while the "% allocation" are different from those listed below, these funds typically make up the core of Vanguard's Target Retirement and Lifestrategy funds.[note 1]

Three-fund lazy portfolios
Bill Schultheis' Three-fund portfolio [2]
 % Allocation Fund Mutual Fund ETF Fund (ER)
Investor's (ER) Admiral's (ER)
33% Vanguard Total Bond Market Index Fund VBMFX (.20%) VBTLX (.08%) BND (.08%)
34% Vanguard Total Stock Market Index Fund VTSMX (.17%) VTSAX (.05%) VTI (.05%)
33% Vanguard Total International Stock Index Fund VGTSX (.22%) VTIAX (.14%) VXUS (.14%)


Scott Burns' Couch Potato portfolio / Andrew Tobias' Three Fund portfolio[3]
 % Allocation Fund Mutual Fund ETF Fund (ER)
Investor's (ER) Admiral's (ER)
33% Vanguard Inflation-Protected Securities Fund VIPSX (.20%) VAIPX (.11%) -
34% Vanguard Total Stock Market Index Fund VTSMX (.17%) VTSAX (.05%) VTI (.05%)
33% Vanguard Total International Stock Index Fund VGTSX (.22%) VTIAX (.14%) VXUS (.14%)


Rick Ferri's Lazy Three Fund Portfolio [1][note 2]
 % Allocation Fund Mutual Fund ETF Fund (ER)
Investor's (ER) Admiral's (ER)
40% Vanguard Total Bond Market Index Fund VBMFX (.20%) VBTLX (.08%) BND (.08%)
40% Vanguard Total Stock Market Index Fund VTSMX (.17%) VTSAX (.05%) VTI (.05%)
20% Vanguard Total International Stock Index Fund VGTSX (.22%) VTIAX (.14%) VXUS (.14%)

Lazy3.PNG

Ferrithreefund.png


Core four portfolios

As proposed by Rick Ferri on the Bogleheads® forum, the Core Four are four funds which form the "cornerstone" of a portfolio. Using Vanguard funds these four low-cost, total market funds would be:

Core-Four Portfolio, Funds
Fund Mutual Fund ETF Fund (ER)
Investor's (ER) Admiral's (ER)
Vanguard Total Bond Market Index Fund VBMFX (.20%) VBTLX (.08%) BND (.08%)
Vanguard Total Stock Market Index Fund VTSMX (.17%) VTSAX (.05%) VTI (.05%)
Vanguard Total International Stock Index Fund VGTSX (.22%) VTIAX (.14%) VXUS (.14%)
Vanguard REIT Index Fund VGSIX (.24%) VGSLX (.10%) VNQ (.10%)

Rick proposes that investors first determine their bond allocation. With the remaining funds, allocate 60% to US stock, 30% to international and 10% to REIT. For example, for 60/40 and 80/20 portfolios, you would end up with the following [1]:

Core-Four Portfolio, Asset Allocations
Desired
Stock/Bond
Allocation
Vanguard Total
Bond Market
Index Fund
Vanguard Total
Stock Market
Index Fund
Vanguard Total
International Stock
Index Fund
Vanguard
REIT Index
Fund
60/40 40% 36% 18% 6%
80/20 20% 48% 24% 8%
Core Four 60 40.PNG Core Four 80 20.PNG


Rick stresses that the exact numbers aren't important. For the 60/40 portfolio, you could increase Vanguard REIT Index Fund to 10%, drop Vanguard Total Stock Market Index Fund to 35% and the Vanguard Total International Stock Index Fund to 15% if you like round numbers.

The core-four is just a low cost foundation for your portfolio. You could add a slice of value stocks (US and/or International). You could split the bond portion between Treasury Inflation Protected Securities and nominal bonds, which would result in a slightly more conservative version of David Swensen's model portfolio (less international stock and less REIT, but otherwise the same four base funds plus TIPS.

More lazy portfolios

Beyond the simple 3- and 4-fund lazy portfolios are more complex portfolios. These are still "lazy" in that they contain enough bonds (typically 30-40%) to allow the investor to maintain the same AA for much of the accumulation phase of their lives. The more complex funds add REITs, and 'slice and dice' the US and/or International stocks, adding large and small value to the mix. It is worth noting that in some of the cases outlined below, a simpler portfolio may be able to accomplish similar goals. For example, a small and value tilt away from the market may be accomplished by adding a small cap value fund, thus 'tilting' from a total stock market fund.

Bill Schultheis's "Coffeehouse" portfolio

This simple 7-fund portfolio was made popular by Bill Schultheis' book The Coffeehouse Investor. He advocates 40% in an intermediate term bond fund and 10% each in various stock funds. More information can be found at The Coffeehouse Investor. The Coffeehouse Portfolio contains only 10% international stocks (17% of total equities). It slices up the domestic portion, but uses a total international fund.

Asset Class  % Allocation
Large Blend 10%
Large Value 10%
Small Blend 10%
Small Value 10%
Total International 10%
REIT 10%
Intermediate Term Bond Index 40%
CoffeeHouse Portfolio.PNG


William Bernstein's "Coward's" portfolio

William Bernstein is the author of several books including The Intelligent Asset Allocator and The Four Pillars of Investing. He introduced the Coward's Portfolio in 1996. The "coward" refers not to the investor's risk tolerance but to the strategy of hedging one's bets and having slices of a number of asset classes. This portfolio is similar to the Coffeehouse Portfolio except that short term bonds are used, and the international portion is divided into equal slices of Europe, Pacific and Emerging markets.

Asset Class  % Allocation
Total Stock Mkt 15%
Large Value 10%
Small Blend 5%
Small Value 10%
Europe 5%
Pacific 5%
Emerging Markets 5%
REIT 5%
Short Term Bond 40%
Bernstein Coward Portfolio.PNG


Frank Armstrong's "Ideal Index" portfolio

Frank Armstrong, author of The Informed Investor, proposed this portfolio for an MSN Money article. It contains a smaller allocation to bonds, and a much larger allocation to international stocks (in fact the equities, excluding REIT, are split 50/50 between domestic and international). Like Bernstein he advocates short term bonds. If the domestic slices were replaced by a total market fund, this portfolio would be very close to the 3-Fund portfolios, with a slice of REIT added.

Asset Class  % Allocation
Large Blend 7%
Large Value 9%
Small Blend 6%
Small Value 9%
Total International 31%
REIT 8%
Short Term Bond 30%
Armstrong Ideal Index Portfolio.PNG


David Swensen's lazy portfolio

David Swensen is CIO of Yale University and author of Unconventional Success. His lazy portfolio uses low-cost, tax-efficient total market funds, a healthy dose of real estate, and inflation-protected securities (TIPS).

Asset Class  % Allocation
Total Stock Mkt 30%
Intl Developed Mkt 15%
Emerging Markets 5%
Real Estate 20%
US Treasury Bonds 15%
TIPS 15%
Swensen Lazy Portfolio2.PNG


Permanent Portfolio

The Permanent Portfolio was devised by free-market investment analyst Harry Browne in the 1980s as a buy-and-hold portfolio that contains a healthy allocation to gold. The portfolio holds equal allocations of domestic stocks, gold, short-term treasury bonds, and long term treasury bonds.[4]

Forum members Craig Rowland and J. M. Lawson have written a book, 'The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy, detailing every aspect of the Permanent Portfolio.

The portfolio can be implemented with an investment in a low cost US total stock market index fund, along with direct investments in gold bullion coins, US treasury bills, and US treasury bonds. It can also be implemented with low-cost exchange-traded funds. See Blackrock iShares for an ETF version of the portfolio.

Permanent Portfolio
US Permanent Portfolio
 % Allocation Asset class
25% US total stock market
25% Gold bullion
25% US treasury bills
25% US long-term treasury bonds
USpermport.png

Canadian versions of lazy portfolios

Below are a few examples of lazy portfolios (also called simple portfolios) that can be utilized by Canadian domiciled investors.

Three ETFs

Three-ETF portfolios consist of Canadian bonds, Canadian stocks and global stocks. Here we show an example[5] using TSX-traded ETFs from Vanguard Canada:

Asset Class ETF Amount
Domestic stocks Vanguard FTSE Canada All Cap Index ETF (VCN) 25%
Global stocks Vanguard FTSE All World ex Canada Index ETF (VXC) 25%
Domestic bonds Vanguard Canadian Aggregate Bond Index ETF (VAB) 50%
Vanguard Canadian 3-Fund Portfolio.png

Suitable alternatives from other vendors for two of the three ETFs in the table above are mentioned in the following pages: Canadian bonds and Canadian equities. For global stocks, VXC currently has few competitors on the TSX. There are US-listed options for the global equity ETF, such as VT, but they include a small percentage (3-4%) of Canadian equities.

This 3-fund portfolio may appear overly simplistic. Certainly the brokerage statements will look very boring. Yet this portfolio has the following characteristics:

  • Exposure to over 500 Canadian bonds (terms of 1 to over 25 years; credit ratings covering the full investment grade spectrum, include government and corporate bonds)
  • Exposure to nearly 250 Canadian stocks covering large-, mid- and small-capitalizations
  • Exposure to thousands of large- and mid-capitalization stocks from other developed and emerging markets
  • Will be very easy to rebalance
  • Weighted average management fee of 0.14% (December 2014), full MER will be a few basis points higher
  • No currency exchange fees for ETF transactions using Canadian dollars
  • No currency hedging of global equities

Model portfolios maintained by Canadian Couch Potato use the same three ETFs as in the example above, with a range of fixed income from 10 to 70% of the portfolio. For equities, his Canadian:Global mix is 1:2 instead of 1:1.

Four index funds

Simple index portfolios with four index funds include Canadian equities, US equities, EAFE Equities, and Canadian bonds. The following table is an example of a simple index portfolio built with "FPX Balanced" allocations, using four TD e-funds as a example of low-cost index mutual funds:


FPX Balanced Four-index funds Portfolio
Asset Class ETF Amount
Domestic stocks TDB900 (TD Canadian Index Fund - e) 25%
International stocks TDB911 (TD International Index Fund - e) 15%
US stocks TDB902 (TD U.S. Index Fund - e) 10%
Domestic bonds TDB909 (TD Canadian Bond Index Fund - e) 50%
FPX Balanced Four-index funds.png


Further discussion of this example is found in Building a portfolio, including links to index mutual funds from other vendors.

Model portfolios maintained by Canadian Couch Potato use the same four index funds as in the example above, with a range of fixed income from 10 to 70% of the portfolio. For equities, his Canadian:US:International mix is 1:1:1. The model with 40% bonds is traditionally known as the Global Couch Potato portfolio from MoneySense[6][7]

Four ETFs

Simple index portfolios with four ETFs include Canadian equities; US equities; EAFE Equities; and Canadian bonds. Sticking with our 50:50 mix of equities and fixed income, using the FPX Balanced index to allocate equities, and using BMO etfs for illustration purposes, we get:

FPX Balanced Four-ETF Portfolio
Asset Class ETF Amount
Domestic stocks ZCN (BMO S&P/TSX Capped Composite Index ETF) 25%
International stocks ZEA (BMO MSCI EAFE Index ETF) 15%
US stocks ZSP (BMO S&P 500 Index ETF) 10%
Domestic bonds ZAG (BMO Aggregate Bond Index ETF) 50%
FPX Balanced Four-ETF Portfolio.png

Equivalent ETFs from other vendors could also be used, and are listed in the following pages: Canadian bonds, Canadian equities, US equities and International equities.

Notes

  1. See Three-fund_portfolio for more information on 3-fund portfolios.
  2. Rick has stated that "The mix between U.S. stocks and international stocks can be changed to suit your preference for dollar exposure. Another option is to swap the total bond market index fund for an investment-grade corporate bond index fund that provides higher yield or a Treasury Inflation Protected (TIPs) fund the provides inflation protection."

See also

References

  1. 1.0 1.1 1.2 1.3 Three Simple Index Fund Portfolios
  2. Kirk Report: Bill Schultheis' Coffeehouse Portfolios (2/13/2007) (Web site redesigned; link now requires paid membership.)
  3. Couch Potato Cookbook
  4. Permanent Portfolio - Early Retirement Extreme Wiki
  5. Re: Simple Portfolios 2014, Financial Wisdom Forum discussion.
  6. Duncan Hood and Ian McGugan, MoneySense, Couch Potato Portfolio: Introduction, April 5th, 2006, viewed December 31, 2014
  7. Duncan Hood and Ian McGugan, MoneySense, Couch Potato Portfolio: Meet the potato family, April 5th, 2006, viewed December 31, 2014

External links

Portfolio return data