By John Wasik
CHICAGO, Feb 3 (Reuters) - 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 Kirkland, Washington.)
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 percent.
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 percent bonds.
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.
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 that country.
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 fund.
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.