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  • 1. Question Of The Month – August, 2008 Why Use A “Lazy” Investment “Portfolio”? Paul Farrell, a columnist for Marketwatch.com and author of Lazy Person’s Guide To Investing, has been telling us about the advantages of Lazy Portfolios using index funds. He says that he wrote his book for “procrastinators, the financially challenged and everyone who worries about dealing with their money.” Farrell says that most people think that if you want to make big money on Wall Street, you have to buy and sell the right stocks at the right time. The “Lazy Portfolios” that Farrell writes about were developed by a number of individuals ranging from a Second Grade student to a portfolio developed by Ted Aronson, a professional who manages about $25 billion in institutional money but prefers to keep his family money in his passive “Lazy Porfolio.” Why not? His passive portfolio has averaged an annual 16.37% return the past five years. Farrell says “If you don't have a Lazy Portfolio, now is the time to build your own using the eight models below. And remember, back in the bad old days of the 2000-2002 bear-recession, one of them, the Coffeehouse, was killing the S&P 500 by 15 percentage points each of the three years -- more proof passive investing beats action. You also don't need a lot of funds with this strategy. That's important if you're young, new at the game or just don't have a lot of money to invest.” Here is Farrell’s comparison of the bottom lines of all eight Lazy Portfolios. 3-year 5-year Equity No. of 1-year Portfolio annualized annualized % funds return return return Second Grader's 90 3 -2.67% 11.06% 13.18% Starter Aronson Family 80 11 2.77 13.83 16.37 Taxable Yale U's 70 6 -0.35 9.96 12.54 Unconventional Margaritaville 67 3 2.78 10.80 12.42 FundAdvice Ultimate 60 11 2.02 10.66 12.44 Buy & Hold Dr. Bernstein's No- 75 4 -2.79 9.58 11.74 Brainer Dr. Bernstein's 60 9 -1.79 8.57 10.57
  • 2. Smart Money Coffeehouse 60 7 -2.57 7.66 10.09 S&P 500 100 n/a -6.70 7.57 9.77 Source: Morningstar Inc. Data as of June 2. Second grader's starter portfolio Got less than $10,000? Start with a portfolio like Kevin Roth's three-funder. Kevin put his together as an eight-year-old second-grader. He takes a long view and has 90% in equities. He beat the S&P 500 with average 13.18% returns over last five years. 3-year 5-year 1-year Fund Allocation annualized annualized return return return Vanguard Total Stock 60% -6.34% 8.20% 10.74% Market Index Vanguard Total International Stock 30% 1.64 19.11 21.21 Index Vanguard Total Bond 10% 6.40 4.08 3.67 Market Index Portfolio 100% -2.67 11.06 13.18 Margaritaville portfolio Scott Burns, a popular Dallas Morning News columnist, has a three-fund portfolio that also beat the S&P 500 with average five-year returns of 13.18%. Scott's Margaritaville portfolio has a third each in foreign equities, domestic equities and inflation-protected securities. Real simple, no timing, just rebalance annually. 3-year 5-year 1-year Fund Allocation annualized annualized return return return Vanguard Inflation- 33.3% 13.04% 5.10% 5.31% Protected Securities Vanguard Total International Stock Index 33.3% 1.64 19.11 21.21 VGTSX Vanguard Total Stock 33.3% -6.34 8.20 10.74 Market Index
  • 3. Total portfolio 100% 2.78 10.80 12.42 Dr. Bernstein's No-Brainer portfolio Paul has been tracking two portfolios from neurologist and financial adviser Dr. William Bernstein, author of "The Four Pillars of Investing," and the “Intelligent Asset Allocator”. Here's a four-fund portfolio from his EfficientFrontier.com Web site: 3-year 5-year 1-year Fund Allocation annualized annualized return return return Vanguard 500 Index 25% -6.78% 7.44% 9.63% Vanguard European 25% -2.61 17.69 19.58 Stock Index Vanguard Small Cap 25% -8.16 9.10 14.08 Index Vanguard Total Bond 25% 6.40 4.08 3.67 Market Index Total Portfolio 100% -2.79 9.58 11.74 Yale U. Unconventional portfolio David Swensen is the megasuccessful manager of the Yale Endowment Fund. His best selling book, "Unconventional Success," offered a six-fund portfolio. In spite of a heavy 20% in real estate, he's still beating the S&P 500, averaging over 12% the past five years. 3-year 5-year 1-year Fund Allocation annualized annualized return return return Vanguard Inflation- 15% 13.04% 5.10% 5.31% Protected Securities Vanguard REIT Index 20% -12.37 10.54 16.94 Vanguard Long-Term 15% 9.00 3.49 3.72 Treasury Index Vanguard Emerging 5% 21.26 31.92 33.61 Markets Stock Index Vanguard Developed 15% -2.26 16.74 19.30 Markets Index
  • 4. Vanguard Total Stock 30% -6.34 8.20 10.74 Market Index Total portfolio 100% -0.35 9.96 12.54 Coffeehouse portfolio Bill Schultheis was a long-time Smith Barney broker before becoming a financial adviser in the nineties. Jack Bogle, founder of the Vanguard Group mutual fund company, says that Schultheis "Coffeehouse Investor" is the No. 1 book he recommends to new investors. As with the Yale portfolio, the Coffeehouse Lazy portfolio was hurt by housing exposure. Still he's making a comeback and beating the S&P 500. 3-year 5-year 1-year Fund Allocation annualized annualized return return return Vanguard 500 Index 10% -6.78% 7.44% 9.63% Vanguard REIT Index 10% -12.37 10.54 16.94 Vanguard Small Cap 10% -8.16 9.10 14.08 Index Vanguard Small Cap 10% -12.27 6.86 13.41 Value Index Vanguard Total Bond 40% 6.40 4.08 3.67 Market Index Vanguard Total International Stock 10% 1.64 19.11 21.21 Index Vanguard Value Index 10% -13.33 7.20 10.95 Total portfolio 100% -2.57 7.66 10.09 Dr. Bernstein's Smart Money portfolio Here's Bernstein's nine-fund portfolio, first seen in his Smart Money column years ago. It's still a winner. His investment strategy totally reflects his long-term perspective on life, his practice and his writings, especially his fascinating new book about the history and impact of global commerce, "A Splendid Exchange: How Trade Shaped the World." And, yes, his passive portfolio regularly outperforms the market. Fund Allocation 1-year 3-year 5-year
  • 5. annualized annualized return return return Vanguard Emerging 5% 21.26% 31.92% 33.61% Markets Stock Index Vanguard European 5% -2.61 17.69 19.58 Stock Index Vanguard Pacific Stock 5% -1.47 14.80 18.95 Index Vanguard REIT Index 5% -12.37 10.54 16.94 Vanguard Short-Term Investment Grade Index 40% 4.72 4.32 3.41 VFSTX Vanguard Small Cap 5% -8.16 9.10 14.08 Index Vanguard Small Cap 10% -12.27 6.86 13.41 Value Index Vanguard Total Stock 15% -6.34 8.20 10.74 Market Index Vanguard Value Index 10% -13.33 7.20 10.95 Total portfolio 100% -1.79 8.57 10.57 Aronson Family's Taxable portfolio Ted Aronson's AJO Partners manages $25 billion in institutional assets. He's one of America's rare money managers who is honest enough to tell you where his own family's money is invested. It's worth him bragging about, averaging a hot-hand 16.37% for his 11-fund portfolio the past five years compared with just 9.77% for the S&P 500. 3-year 5-year 1-year Fund Allocation annualized annualized return return return Vanguard 500 Index 15% -6.78% 7.44% 9.63% VFINX Vanguard Emerging Markets Stock Index 20% 21.26 31.92 33.61 VEIEX Vanguard European 5% -2.61 17.69 19.58 Stock Index VEURX
  • 6. Vanguard Extended 10% -6.46 10.02 14.34 Market Index VEXMX Vanguard High-Yield 5% -1.73 4.55 5.96 Corporate VWEHX Vanguard Inflation- Protected Securities 10% 13.04 5.10 5.31 VIPSX Vanguard Long-Term 5% 9.00 3.49 3.72 U.S. Treasury VUSTX Vanguard Pacific Stock 15% -1.47 14.80 18.95 Index VPACX Vanguard Small Cap 5% -4.11 11.17 14.53 Growth VISGX Vanguard Small Cap 5% -12.27 6.86 13.41 Value Index VISVX Vanguard Total Stock 5% -6.34 8.20 10.74 Market Index VTSMX Total portfolio 100% 2.77 13.83 16.37 FundAdvice.com's Ultimate Buy and Hold portfolio The FundAdvice.com's 11-fund Ultimate Buy and Hold portfolio has also been beating the S&P 500 across the board, generating returns over 12% on a five-year basis. And doing it with a 60/40 asset allocation, equities to fixed income. 3-year 5-year 1-year Fund Allocation annualized annualized return return return Vanguard 500 Index 6% -6.78% 7.44% 9.63% Vanguard Value Index 6% -13.33 7.20 10.95 Vanguard Small Cap 6% -8.16 9.10 14.08 Index Vanguard Small Cap 6% -12.27 6.86 13.41 Value Index Vanguard REIT Index 6% -12.37 10.54 16.94 Vanguard Emerging 6% 21.26 31.92 33.61 Markets Stock Index Vanguard Developed 12% -2.26 16.74 19.30
  • 7. Markets Index Vanguard International 12% 0.57 19.21 22.09 Value Vanguard Short-term 12% 8.05 4.73 3.27 Treasury Vanguard Intermediate- 20% 10.54 4.92 3.68 term Treasury Vanguard Inflation- 8% 13.04 5.10 5.31 Protected Securities Total Portfolio 100% 2.02 10.66 12.44 Farrell says “If you're one of America's 95 million passive investors worried about the economy and the markets sinking further in 2008 and perhaps a bigger meltdown coming sometime around 2011-2012 before the end of the next presidential term ... and if you're worried about a decade-long stagflation ... forget market timing and active trading, you'll lose money. Preserve your capital. If you want long-term results, build your own balanced portfolio.” If you’re interested in a more detailed analysis of how the "Lazy Portfolios" work, take a look at his " Lazy Person's Guide to Investing."