Assemble a Portfolio via Lazy Investing

Physician's Money Digest, August15 2004, Volume 11, Issue 15

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The Lazy Person's Guide to Investing

Being called a couch potato isn'tnecessarily a good thing. It generallymeans that you sit aroundtoo much, don't get enough exercise,and are probably unhealthy. However,when it comes to investing, having a CouchPotato Portfolio might be a very good thing.That's what Paul Farrell, JD, PhD, columnistfor says in his newbook, (Warner Business Books; 2004). It's a book,writes Dr. Farrell, for people, physicians included, whohave more important things to do today than worryabout their investments.

Lazy Portfolio Definition

Dr. Farrell notes that he began using the term "lazyportfolios" because it seemed like the best way todescribe what are essentially low-maintenance portfolios."Most people really do want a portfolio that's likea lazy day in the sun—a lazy portfolio that works in thebackground while you go about your daily life doingwhat's really important to you," he writes.

According to Dr. Farrell, lazy investing is WallStreet's best-kept secret. The reason, he says, isbecause brokers don't make any money on lazy portfolios,"so you won't see them being pushed." Forstarters, he says there are six basic rules to follow:

Do it yourself, and always be sure to purchaseno-load mutual funds. You should neverhave to pay a broker's commission whenbuilding your lazy portfolio.

Build a winning, well-diversifiedportfolio with 11 funds or less.

Follow a buy-and-hold strategy. Buyquality upfront, intending never to sell.

Lazy portfolios win by being average,so make low-cost index funds part ofyour lazy portfolio.

Active trading kills your returns.This happens because transaction costs can doubleyour expenses and taxes. Never trade.

  • Trust the power of compounding by startingearly and saving regularly.

Winning Lazy Portfolios

There are many versions and varieties of lazyportfolios, but the three mainstays that Dr. Farrellendorses have been big winners for a long time. Theyare the Couch Potato Portfolio, the CoffeehousePortfolio, and the No-Brainer Portfolio.

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Scott Burns, a financial columnist with the , developed the Couch PotatoPortfolio in 1991. Annual returns for the portfolioover the past 15 years are 11.4%, and 22% last year.

Building a Couch Potato Portfolio is quick andeasy, Dr. Farrell notes. All you need are two funds ina 75/25 asset allocation split, or 50/50 for a moreconservative approach. This mix provides all thediversification you'll need, through both bear andbull markets. The split, Dr. Farrell says, should be75% in the Vanguard 500 Index, a $75-billion no-loadfund that tracks the S&P 500, and 25% in theVanguard Total Bond Market Index fund, whichmatches the performance of the Lehman BrothersAggregate Bond Index. Then, all you need to do isspend 10 minutes rebalancing at year's end.

The CoffeehouseInvestor

The second lazy portfolio, the CoffeehousePortfolio, contains only seven funds and requires norebalancing. Bill Schultheis, a former Salomon SmithBarney broker and author of (Longstreet Press; 1998), developed theportfolio in 1999. The portfolio has averaged a10.8% return over the past 13 years, and a solid23.5% return in 2003.

The asset allocation is equally simple for theCoffeehouse Portfolio: 40% in an intermediate bondindex (Vanguard's Total Bond Index)and 10% in each of six equity funds—Vanguard's S&P 500 Index, Large ValueIndex, Small Cap Index, Small CapValue Index, Morgan Stanley CapitalInternational Europe, Australasia, FarEast Index, and Real Estate InvestmentTrust (REIT) Index.

Last, but certainly not least, is the No-Brainer Portfolio. This portfolio, developedby financial advisor and physicianWilliam Bernstein, is comprised of ninefunds and has experienced long-term returns in the11% range. Similar to the Couch Potato andCoffeehouse portfolios, it is built with Vanguard fundsbecause they are no-loads with low expense ratios.

The asset allocation breakdown for the No-Brainer Portfolio of nine funds is as follows: Short-Term Corporate Bond Index (40%); Total StockMarket (15%); Small Cap Value (10%);Large Cap Value Index (10%); EuropeanStock Index (5%); Pacific Stock Index(5%); REIT Stock Index (5%); SmallCap Index (5%); and Emerging MarketsIndex (5%).

Dr. Farrell writes, "There really are somany more important things in life thanworrying about your investments everyday." And lazy portfolios are importanttools that you can use to free you fromthose worries.