ACZoom  ·  Archive-2016

Long term investing - with so many options available it is great to read all about lazy portfolios and how they can be the best bet for passive, long-term investors. The key to a steady and good investment strategy relies on diversification - selecting a bunch of categories with historical returns that are not correlated to one another - one may go up while another may go down and vice-versa.

Here's a site with many articles on Lazy Portfolios - Paul Farrell on Lazy Portfolio Performance, beating the S&P 500 for passive investors, advisers and pros ... Simple well-diversified portfolios of three to 11 low-cost, no-load index funds... Aronson Family Portfolio, No-Brainer Portfolio(Dr. William Bernstein), Coffeehouse Portfolio (Bill Schultheis), ...
Interview and portfolio - NPR: Yale's Money Guru David Swensen's Advice for the Individual Investor: Beware of the Mutual Fund Myth ... for-profit mutual funds have an inherent conflict of interest. They make money by charging fees that suck profits away from investors in the funds.

Now the truth is that the Nobel-Prize winning Modern Portfolio Theory is over 50 years old, but it is still going strong even though some people may argue whether risk and volatility should be tied together given that most people may be ok with large upside volatility and only concerned about downside volatility. I would lay credence to what David Swensen says above - essentially that there are many other factors that go into what a for-profit financial professional looks at, and Swensen's analysis shows that diversifying and looking for lowest transaction costs is the key and this strategy is something every investor is capable of executing on their own.

In addition to the sample portfolios at the web site, some additional pointers include looking at your portfolio as a whole - look at tax-deferred investments as well as taxable investments. Partition your portfolio so that the tax-advantaged investments are in the taxable accounts, and things like bonds or income producing investments stay in the tax-deferred accounts. The way to do this is to list your investment choices in decreasing order of tax-efficiency - for example Total Bond Market Index fund would be higher on the list, and Total Stock Market Index fund would be lower on the list and assign dollar amounts you will be making to each of the investments. And then start allocating the top of the list to tax-deferred accounts such as 401K plans or IRAs, and once that is maxed out, allocate the rest to regular non-IRA taxable accounts.

The great thing about this is one can pick a portfolio, look at it once a year or so, and re-balance if necessary, do some research, and then repeat after a year. And then when the time comes to start withdrawals, follow the advice from the Yale Guru - move money out of all your investment categories proportionally - from all of them - into money-market accounts or short-term inflation indexed bonds.

These portfolios are also a good start for those who want to be somewhat more active in their investment strategies - and indulge in at least some sort of limited timing the market. Given the wide variety of lists and allocations that may be promoted by different financial analysts, it is perfectly fine to start with one of these lists, and modify the percentages as you see fit. The general idea of being diversified can lead to this type of portfolio, something that I think looks good in June 2007 using Vanguard funds and US Savings Bonds:

  20% Total Bond Market Index VBMFX
  50% Total Stock Market Index VTSMX
  20% Total International VGTSX
  10% Inflation-Protected US Bonds

The list itself can be manipulated by splitting the total stock market allocation into Value and Growth funds, or large and small cap, with varying proportions. This certainly deviates from strictly following the lazy portfolios, but if not done to excess, it can be fun and still offer many of the advantages of a fixed asset allocation portfolio. This also does not include any REIT - here's where I am using timing - the cost is too high right now, coming down now for sure, but will probably stay low for next two to three years - therefore, use the next two to three years to slowly add a REIT category, around 5% is a good target and ge there by reducing the big-caps like Total Stock Market.
Apart from investments, an individual investor should also keep readily convertible assets such as Money Market or CD accounts with 6 months to 2 years of expenses to handle employment-loss events and also have exposure to real-estate by owning all or part-of a house.

Disclaimer: clearly, there is no claim to any financial advice here. Use at your own risk - no guarantee, no warranty. Financial topics can be enjoyable, and there is no point investing on your own unless it can be done easily, simply, and yet be on track to beat the "actively managed" funds crowd.