MarketWatch "Lazy Portfolios"

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willthrill81
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MarketWatch "Lazy Portfolios"

Post by willthrill81 » Tue May 16, 2017 2:39 pm

Periodically, MarketWatch's "Lazy Portfolios" is mentioned on this forum, usually to compare the three-fund portfolio (i.e. 'Second Grader's Starter') to seven other portfolios, all of which seem at least fairly reasonable to me.

However, the bond allocation to these portfolios varies significantly. All of the portfolios have anywhere from a 25% to 40% bond allocation with the exception of the three-fun portfolio, which only has 10% in bonds. Without knowing anything at all about each portfolio's composition, it's easy to see that the portfolio with the smallest bond allocation would have performed the best in recent years.

Further, the three-fund has one-third of the equities in international, while many of the other portfolios are closer to an even split between U.S. and international equities. Again, given the record of recent years, can you guess which portfolios have done the best? Those tilted toward U.S. equities of course.

I bring this up merely to demonstrate that when comparing portfolios, any portfolios, a crucial aspect to be aware of is the basic AA of each. Also, I would argue that the U.S./international equity split is important to aware of as well when making comparisons. Finally, don't just look at someone's list of portfolios and their recent performance in deciding what is appropriate for you.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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nedsaid
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Re: MarketWatch "Lazy Portfolios"

Post by nedsaid » Fri May 19, 2017 9:56 pm

I like Taylor Larimore a whole lot but I do cringe a bit when he says that the 2nd Grader starter portfolio outperforms most everything else. It is a 90% stock portfolio, no wonder that it would outperform other "Lazy Portfolios" that have something more like a 60/40 allocation. The stock market has been very strong since the 2008-2009 bear market and financial crisis.
A fool and his money are good for business.

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willthrill81
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Re: MarketWatch "Lazy Portfolios"

Post by willthrill81 » Fri May 19, 2017 10:16 pm

nedsaid wrote:I like Taylor Larimore a whole lot but I do cringe a bit when he says that the 2nd Grader starter portfolio outperforms most everything else. It is a 90% stock portfolio, no wonder that it would outperform other "Lazy Portfolios" that have something more like a 60/40 allocation. The stock market has been very strong since the 2008-2009 bear market and financial crisis.
:beer

When one starts comparing apples to apples, the three fund portfolio's recent performance looks a lot less glamorous. For instance, the 'Ultimate Buy-and-Hold' portfolio (60/40) has significantly lower performance than the three-fund, but if we changed the UBH to 90/10, keeping everything otherwise weighted the same, it has beaten the three-fund by about 30 basis points over the last ten years.

I'm not saying that the three-fund portfolio is bad by any means, but I really think, IMHO, that there are a number of other very plausible portfolios out there that will outperform it in terms of returns and volatility over the long haul. I think its simplicity combined with 'owning the whole market' are very 'aesthetically pleasing' to many people.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

GLState
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Re: MarketWatch "Lazy Portfolios"

Post by GLState » Sat May 20, 2017 8:10 am

The 2nd Grader's portfolio on MarketWatch is a three fund portfolio but it is not THE three fund portfolio. According to this boglehead page, https://www.bogleheads.org/wiki/Three-fund_portfolio , Taylor Larimore's Three Fund Portfolio is equal weight.

"Vanguard funds
From Vanguard's list of "core funds," the funds that are best for a three-fund portfolio are:

Vanguard Total Stock Market Index Fund (VTSMX)
Vanguard Total International Stock Index Fund (VGTSX)
Vanguard Total Bond Market Fund (VBMFX)
So, a "three-fund portfolio" might consist of 42% Total Stock Market Index, 18% Total International Stock Index, and 40% Total Bond Market fund.

Taylor Larimore's' "Lazy Portfolio" in fact, consists of these three funds in equal proportions."

However, the way I read Mr. Larimore's many three-fund posts is that the allocation to Total Bond is up the the individual investor based on their specific situation and risk tolerance. The allocation to Total International being not more than 20% of the equity portion of the portfolio.

Other investors may prefer a higher allocation to Total International. A portfolio consisting on only these three funds, can be suitable for a 2nd Grader or a Retiree.

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Re: MarketWatch "Lazy Portfolios"

Post by Johnnie » Sat May 20, 2017 10:49 am

nedsaid wrote:I like Taylor Larimore a whole lot but I do cringe a bit when he says that the 2nd Grader starter portfolio outperforms most everything else. It is a 90% stock portfolio, no wonder that it would outperform other "Lazy Portfolios" that have something more like a 60/40 allocation. The stock market has been very strong since the 2008-2009 bear market and financial crisis.
I cringe and I also get angry because Taylor keeps doing it despite complaints that it paints a false and misleading picture. I can't help noticing that it is invariably deployed when I or someone else cites Paul Merriman's work, which almost suggests an animus there, although it may be an animus against any expert who recommends a slice-and-dice approach vs. the pure Bogle TSM.

I would still be wandering in the timing wilderness but for the mini retirement investing course represented by Merriman's articles on Marketwatch and his website, so this feels a bit personal to me.
"I know nothing."

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nedsaid
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Re: MarketWatch "Lazy Portfolios"

Post by nedsaid » Sat May 20, 2017 11:03 am

Johnnie wrote:
nedsaid wrote:I like Taylor Larimore a whole lot but I do cringe a bit when he says that the 2nd Grader starter portfolio outperforms most everything else. It is a 90% stock portfolio, no wonder that it would outperform other "Lazy Portfolios" that have something more like a 60/40 allocation. The stock market has been very strong since the 2008-2009 bear market and financial crisis.
I cringe and I also get angry because Taylor keeps doing it despite complaints that it paints a false and misleading picture. I can't help noticing that it is invariably deployed when I or someone else cite Paul Merriman's work, which almost suggests an animus there, although it may be an animus against any expert who recommends a slice-and-dice approach vs. the pure Bogle TSM.

I would still be wandering in the timing wilderness but for the mini retirement investing course represented by Merriman's articles on Marketwatch and his website, so this feels a bit personal to me.
I think Taylor's response is that a simple portfolio will perform as well or better than a complicated one. Can't speak for him but he has read many, many investment books and can remember way back when Merriman had a very different investment approach. For one thing, Merriman believes in market timing. I think he had a funds of funds product that didn't work out so well. But Merriman is one of the good guys, he has changed his mind on things over the years as we all have. Merriman is pretty committed to the academic research and low cost investing. I don't think there is animus, it is just that Taylor has a long and good memory and a difference of opinion.

But yes, I don't like the comparisons of a 90/10 portfolio with a 60/40 portfolio.

It really gets down to a "Yankees Fan" vs. "Red Sox Fan" type of thing. Some here are strict market cap weighted indexers and others are tilters. Taylor is definitely in the indexing camp and is definitely a John Bogle disciple. I happen to be a Paul Merriman fan and made changes to my portfolio based on his firm's recommendations.
A fool and his money are good for business.

selftalk
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Re: MarketWatch "Lazy Portfolios"

Post by selftalk » Sat May 20, 2017 11:24 am

Whatever allocation you use stick to it. Hopefully all the variables of allocation candidates will perform well going forward as it`s time in the market and not timing as we`ve all learned here on this website that has an excellent chance to get us where we want to be financially.

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willthrill81
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Re: MarketWatch "Lazy Portfolios"

Post by willthrill81 » Sat May 20, 2017 11:39 am

nedsaid wrote:I think Taylor's response is that a simple portfolio will perform as well or better than a complicated one.
That may or may not be true. It has certainly not been definitively accurate. Whether it will be true in the future is unknowable.
nedsaid wrote:For one thing, Merriman believes in market timing.
Just to clarify this point, in a recent podcast with Rob Berger, Paul laid out specifically why part of his portfolio uses market timing. He says that he does it simply to reduce risk, not to improve his returns. It doesn't work all the time, and Paul was very clear about that.

"Market timing is not about making money, by the way. That’s what a lot of people think—if you market time you’re going to beat the market. No, you’re not going to beat the market!"
https://www.doughroller.net/investing/u ... -merriman/

This perspective is not unique to Merriman either. A few years ago, Larry Swedroe discussed the issue in the post below.

"Zakamulin concluded that the real-life performance of the market-timing strategies suggest that over a long run, one can expect that a market-timing strategy delivers only marginally better risk-adjusted returns than the buy-and-hold strategy, yet with a substantially lower long-term capital growth.

Over a long run the buy-and-hold strategy is more risky, but at the same time, it’s more rewarding than the market-timing strategy.” Moreover, he also cautioned that: “The fact that the market timing strategy showed a better risk-adjusted tradeoff in the past does not automatically mean that the same timing strategy will show a better risk-adjusted tradeoff in the future as well.”"
http://www.etf.com/sections/index-inves ... nopaging=1
Last edited by willthrill81 on Sat May 20, 2017 11:51 am, edited 1 time in total.
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2pedals
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Re: MarketWatch "Lazy Portfolios"

Post by 2pedals » Sat May 20, 2017 11:44 am

I believe the simplicity of the 3 fund portfolio and low cost is the key for me. As I get older and closer to retirement, I believe in this more strongly than ever. I used to fret over investment decisions and market watch on CNBC way too much. I did learn a great lesson from it, it was such a waist of time. I have so many other things to do in my life that I do not want to overlook. Now all I have to do is focus on AA between stocks/bonds. I understand that tilting to SV may perform better in the future, as well as so many other investments decisions. I just don't really want to play the game anymore and let the market and my AA do it's thing.

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telemark
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Re: MarketWatch "Lazy Portfolios"

Post by telemark » Sat May 20, 2017 1:50 pm

The important decision is how much to hold in bonds, followed by how much to allocate to international. As long as you keep the costs low, the other choices really don't matter much, which is probably why we debate them so often: the differences, if any, disappear into the general market noise.

Of course, if you've somehow determined that 41.3% in bonds and 18.2% in international are the optimal proportions for you, the three fund portfolio makes that easy to accomplish.

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willthrill81
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Re: MarketWatch "Lazy Portfolios"

Post by willthrill81 » Sat May 20, 2017 1:59 pm

telemark wrote:The important decision is how much to hold in bonds, followed by how much to allocate to international. As long as you keep the costs low, the other choices really don't matter much, which is probably why we debate them so often: the differences, if any, disappear into the general market noise.

Of course, if you've somehow determined that 41.3% in bonds and 18.2% in international are the optimal proportions for you, the three fund portfolio makes that easy to accomplish.
I agree completely with your first statement. The choice of stocks vs. bonds is by far the most important in terms of returns and volatility.

I disagree with your second statement. People like Larry Swedroe have shown repeatedly under various conditions (i.e. time periods, dozens of countries) that certain factors have indeed led to higher returns. And if those return differences even manifested themselves by half as much in the future as they have in the past, that could easily lead to a substantial difference in total portfolio returns.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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