How a lazy portfolio beat the S&P 500

By John Wasik

I’ve never thought that laziness could be a virtue, but when it comes to investing, it’s often advantageous. You can trade too much and become too pre-occupied with the headlines and business TV shows. It can drive you crazy and you’ll lose lots of money making bad decisions.

Or you can set up a lazy Nano portfolio, which I proposed years ago – and forget about it. Based on my initial plan at MyPlanIQ, a web-based application to help manage retirement accounts, my hypothetical Nano portfolio returned 7.4 percent in their tactical asset allocation model in 2011.

In contrast, the S&P 500 posted a tiny loss for the year.

I paid so little attention to my Nano last year that I only knew what it returned when MyPlanIQ sent me its independent year-end tally last week. I have no relationship with the site, nor did I ever ask them to monitor the portfolio.

They calculated the returns and tweaked the allocations using their own tactical asset algorithm to get better results with fewer funds. While I hold some of the funds in my family’s portfolio, I don’t manage other people’s money. I’m skittish enough managing my own.

I called it Nano because it’s small in composition – only five exchange-traded/mutual funds – and modest in its aspirations. It was my humble contribution to the world of investing – a free exercise in benign neglect and diversification.

Here’s how lazy I am: I don’t try to predict the market, world events, Federal Reserve movements or the next hot sector. In fact, I make no predictions at all – including how my portfolio will perform this year. I have no special skill. My Nano set-up is a middle-of-the road core growth portfolio for someone in their accumulation phase with at least 15 years to go until retirement.

Here’s what’s in it:
* 20 percent Vanguard Total Stock Market ETF
* 20 percent Total International Stock Index Fund
* 20 percent Vanguard REIT ETF
* 20 percent iShares Barclays TIPS Bond
* 20 percent iShares Barclays Aggregate Bond

As you can see, I cover five different asset classes for various reasons. I want to cover most stocks across the globe and some commercial real estate companies. On the bond side, I like the Treasury Inflation-Protected Securities fund and the iShares broad-based U.S. bond fund.

Ideally, not all of these funds will move in the same direction, and up to 60 percent of the holdings are not directly correlated with common stocks. If inflation ticks up, I have some protection in the TIPS fund. All are among the lowest-cost passive funds in their class.

But don’t take my portfolio, or any mix of funds for that matter, as a cookie-cutter template that you don’t adjust. You can customize any portfolio to fit your age and risk tolerance. Those just starting out in a career can amp up the stock portion. If you’re over 50, consider putting more than half of your money into the iShares funds.

Of course, my portfolio is not without risk.

If a major downturn clobbers Europe or the United States, it will be hurting. While I recommend my Nano portfolio to nearly anyone interested in growth, it’s not suitable for everyone.

If you’re close to retirement, you should have at least 60 percent in bonds and TIPS. Right now, my personal mix is roughly 50 percent income investments and the rest in stocks, REITs and the PIMCO Commodity Real Return Strategy fund, a combination of commodities contracts and TIPS – my inflation hedge.

If you’re extremely risk averse, you should consider the ultra-conservative Permanent Portfolio, which posted an 8.3 percent return last year, according to MyPlanIQ. It holds 25 percent in gold, silver and Swiss Francs and the remainder in Treasury securities (35 percent) and growth stocks.

In any case, the allocation is the key, not what you or I think the market will do this year. Focus on what you need to do and set your plan in place like a heavy piece of furniture you don’t plan to move for a while – like that La-Z-Boy recliner.

The author is a Reuters columnist. The opinions expressed are his own.

© Thomson Reuters

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