By John Wasik
CHICAGO Feb 3 For investors concerned about
increasing market volatility, a defensive position might be a
savvy move if stocks continue to retreat from 2013 highs.
You can do that with a "lazy portfolio": Simply buy and hold
passive investments and rebalance then annually. There are
several flavors, including one that I designed years ago, but
generally they are simple, diversified and somewhat defensive.
Even the best lazy portfolio, as monitored by the online
service MyPlanIQ.com, which creates risk-managed portfolios,
fell well short of the stellar performance of the S&P 500 large
company index, which gained 30 percent last year.
The best showing was the "Coffee House Lazy Portfolio,"
which rose nearly 15 percent last year. Based on current
holdings, more than half of the portfolio is in five stock
exchange-traded funds (ETFs), with the remainder in the Vanguard
Total Bond Market Index and Vanguard REIT Index,
two of my own portfolio holdings. (The strategy is based on a
book written by Bill Schultheis, a fee-only financial adviser in
With little cream on the top, the Coffee House portfolio
gives you exposure to large and small growth and bargain-priced
companies throughout the world with bonds and real estate
investment trusts as a buffer.
The Coffee House, which lagged the S&P 500 by half, is a
diversified global portfolio with almost 50 percent of its
investments in assets other than stocks. Like every lazy
portfolio, it was hurt by having money in a broad basket of U.S.
bonds, which dipped 2 percent last year.
My own contribution to indolent investing - the "Wasik Nano"
portfolio - rose just 8 percent last year. I easily beat
inflation, but was bruised by a 40 percent stake in bonds and
Treasury Inflation-Protected Securities through the iShares TIPS
fund, which fell 8 percent last year. If I could revise
this portfolio, I would reduce the TIPS fund holding to 10
Neither of the above mentioned portfolios did as well as the
standard couch potato portfolio for most middle-of-the-road
investors, whose holdings are typically 60 percent stocks and 40
A good proxy for the classic 60/40 mix is the Vanguard
Balanced Index fund, which has beaten four of the top
lazy portfolios tracked by MyPlanIQ for the last one- and
three-year periods. It gained about 18 percent last year. The
fund costs 0.24 percent a year to own and could be a staple in
any moderate, growth-focused portfolio.
WHY DEFENSE IS IMPORTANT THIS YEAR
Owning a lazy portfolio has its conveniences, but will it
make sense this year?
Concerns about slowing global economic growth in developing
economies from South America to China have fueled a pullback
from developed and emerging markets. Investors have yanked money
out of emerging markets in six of the last seven weeks,
according to Lipper, a Thomson-Reuters company.
Investors around the globe fear that the ratcheting down of
the Federal Reserve's stimulative bond-buying policy will make
stocks less attractive.
The slowing flow of "hot money" into emerging markets may
also reflect reduced demand for raw materials and products being
shipped to China. As the largest buyer of raw materials in the
world, China would have an impact on everything from Chilean
copper to Australian coal if it slowed purchases.
China's tightening of bank borrowing may also slow growth in
U.S.-based companies in the S&P 500 that have a global
presence will also feel the pinch - if these slow-down scenarios
play out. That is why a more cautious approach could make sense
if you are looking to preserve principal.
Of the Lazy portfolios that I've studied, David Swensen's
"Yale Individual Investor" might fit the bill for those seeking
growth but not interested in overweighting either stocks or
bonds. Swensen is the manager of Yale University's endowment
Swensen's portfolio holds 30 percent in the Vanguard Total
Stock Market Index, 20 percent in the Vanguard REIT
Index, 20 percent in Vanguard Total International
Stock Index, 15 percent in Vanguard Inflation
Protected Securities, and 15 percent in Vanguard
Long-Term Treasury Index. I own the first three of
these funds in my own portfolio.
The Yale portfolio has proven fairly durable with this
reasonably conservative strategy over the past five years,
returning 15 percent annually, compared with 14 percent for the
Vanguard balanced fund.
No matter what the market does this year, the idea is to
watch interest rates and inflation while investing for domestic
and international growth. While you will never come close to
beating the S&P 500 Index with any of the lazy portfolios, at
least you won't be beaten up if you do not want to concentrate
most of your portfolio in stocks.