Lazy Days

When it comes to a lazy portfolio, the formula for success isn't difficult: Just mix a few index funds

leave it alone

that's all

Your Money

April 25, 2004|By Gregory Karp

Are you just plain lazy when it comes to investing your money? More likely, you're too busy working, raising a family or just living your life to spend lots of time on investment planning.

The solution might be a lazy portfolio.

These portfolios are set-it-and-forget-it groups of mutual funds that can work amazingly well for your long-term investment plans, such as an individual retirement account.

At first blush, these passive portfolios seem too simple. After all, one do-it-yourself portfolio contains a single stock fund and one bond fund. But they work, said Paul B. Farrell, a financial columnist and author of The Lazy Person's Guide to Investing (Warner Business Books, 2004).

"Wall Street has created what I see as a sporting event, an endless horse race," Farrell said. "They're brainwashing people, making them think they have to do something. They have to jump in the market, they have to jump out of the market, which isn't true."

The portfolios offer asset allocations, which involve putting your money in different places so that you're diversified among types of investments. Diversifi-cation has proved to lower risk and increase returns.

Below are simple ways to invest for the long term without knowing a thing about investing and doing little or no maintenance. Most IRA plans allow you to choose the exact investments listed below. Investors with 401(k) plans will have to choose among funds offered by their companies to apply the same principles.

Investors close to retirement might want to raise the portion invested in bonds, Farrell said.

How well do these lazy portfolios perform against other types of investments?

Their returns nearly matched the 2003 and 10-year returns of the S&P 500 index, a much riskier portfolio of only large U.S. stocks with little diversification. The S&P 500 returned about 26 percent in 2003 and 13.8 percent over the past 10 years.

And the lazy portfolios outperformed an all-bond portfolio, a low-risk strategy. Bonds returned about 4 percent last year and about 7 percent over the past 10 years, according to the benchmark bond index, Lehman U.S. Aggregate Index.

THREE NICE AND EASY APPROACHES

Couch Potato Portfolio

by Scott Burns, syndicated financial columnist

Half of your money goes into the Vanguard Index 500, and half goes into the Vanguard Total Bond Index.

That's it. Done.

Historical returns have been solid for such a conservative allocation. In 2003, the Couch Potato returned 16.2 percent, and over the past 10 years, it has returned 9.4 percent, Burns says.

For those feeling more daring, skew the investment toward stocks with the Sophisticated Couch Potato Portfolio: 75 percent of your money in the Vanguard Index 500 and the rest in the Vanguard Total Bond Index. Returns there were 22.4 percent last year and 10.4 percent over the past decade.

The only catch to these portfolios is the minimum investments required for these two funds, $3,000 each, meaning you'd need $6,000 to start a Couch Potato Portfolio, at least when using the Vanguard brand of funds.

You should rebalance any of these lazy portfolios once a year because the stocks and bonds grow at different rates. For example, after a great year for stocks, the simple Couch Potato might contain 60 percent of your money in the stock fund and 40 percent in the bond fund. You just transfer some money from stocks to bonds so that it's again 50-50. With access to your account by phone or Internet, rebalancing takes as little as 10 minutes a year.

Coffeehouse Portfolio

by Bill Schultheis, former Salomon Smith Barney broker, now a financial adviser. (Inspired by Seattle coffeehouse chats with friends.)

This portfolio is 40 percent Vanguard Total Bond Index, 10 percent Vanguard Index 500, 10 percent Vanguard Large Cap Value Index, 10 percent Vanguard Small Cap Index, 10 percent Vanguard Small Cap Value Index, 10 percent Vanguard International Index and 10 percent Vanguard REIT Index.

This seven-fund portfolio slices the stocks portion of the portfolio more finely into subcategories and adds a real estate component, a real estate investment trust.

The Coffeehouse Portfolio returned 23.5 percent last year and has averaged 10.8 percent annually over the past 13 years.

For more on the Coffeehouse Investor philosophy, see www.coffeehouseinvestor.com.

The No-brainer Coward's Portfolio

by William Bernstein

a financial adviser and personal finance author

This portfolio is 40 percent Short-Term Corporate Bond Index, 15 percent Total Stock Market Index, 10 percent Vanguard Large Cap Value Index, 10 percent Small Cap Value, 5 percent European Stock Index, 5 percent Pacific Stock Index, 5 percent REIT Index, 5 percent Small Cap Index and 5 percent Emerging Markets Index.

The nine-fund no-brainer uses short-term bonds, a more conservative choice, and a total market index instead of the S&P 500 index. And it divides the international allocation among European stocks, Pacific Rim stocks and emerging markets.

It returned 24.1 percent last year, with long-term returns at about 11 percent.

Gregory Karp is a personal finance writer for The Morning Call in Allentown, Pa., a Tribune Publishing newspaper.

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