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Three luminaries presented three very similar (two identical) lazy portfolios.
  • Bill Schulthe, a former Smith Barney broker and author of The Coffeehouse Investor.
  • Andrew Tobias, a Harvard alum and writer of 12 books including The Only Investment Guide You'll Ever Need.
  • Scott Burns has covered personal finance and investments for nearly 40 years and ranks as one of the most widely read personal finance writers in the country.

Bill Schultheis' Coffeehouse Portfolios

% Allocation Description Ticker ETF
34% Total US Equities VTSMX VTI
33% Total International Equities VGTSX VEU
33% Total Bond Market VBMFX BND

Scott Burns' Margarita

% Allocation Description Ticker ETF
34% Total US Equities VTSMX VTI
33% Total International Equities VGTSX VEU
33% Vanguard Inflation-Protected Securities Fund VIPSX TIP

Tobias’ 3 Fund Portfolio

% Allocation Description Ticker ETF
34% Total US Equities VTSMX VTI
33% Total International Equities VGTSX VEU
33% Vanguard Inflation-Protected Securities Fund VIPSX TIP

These are all easy to understand and easy to follow portfolios. They only require annual rebalancing and so it is not onerous to build and manage this portfolio.

Note that Tobias and Burns' portfolios are identical so we combine them henceforth.

We will test the results in three dimensions:

Firstly, how does performance compare with a buy and hold strategy for a similar portfolio with monthly rebalancing? For this, we will compare the two portfolios against a 3 asset SIB and measure results.

Comparison of three different 3 Asset Class Portfolios

From this graph, it is clear that the portfolios have similar performance although the lazy portfolios perform slightly better than the monthly rebalancing. This is consistent with other research that says too frequent rebalancing can limit returns. All the portfolios suffer from the big drop around 2008/2009.

Secondly, what impact does adding asset classes have on performance. Three asset classes would be considered insufficient diversification today and we will compare it with a 6 asset SIB with strategic asset allocation.

click to enlarge images

3 Asset Class Portfolios Compared with a 6 Asset Class Portfolio

Here we can clearly see the benefits of adding extra asset classes. Note that the 6SIB portfolio was rebalanced monthly so there is probably more juice that can be extracted from this portfolio. This is not surprising and if you are looking to invest for the long term and rebalance infrequently, having the extra asset classes is not onerous and delivers significant benefit.
The final test is to compare strategic and tactical asset allocation. For this test we will compare the lazy portfolios with a 3 asset SIB with tactical asset allocation, we will also include a 6 asset SIB with tactical asset allocation to see what best in class performance looks like.

Comparison of Tactical and Strategic Asset Allocation

As the lazy portfolios have similar performance characteristics, we have removed one of them to make the graph easier to understand. To get more details, use the full graph.
Tactical asset allocation clearly delivers superior results. While it may not get the highest returns in bull markets, it limits the downturn in bear markets and reduces losses and personal stress. The tactical portfolios are altered monthly so there is extra effort required but the returns are worth it.
Results of the Three and Six Asset Class Portfolios with SAA and TAA
Annual Returns 1 year 3 Years 5 Years
Tobias/Burns 7.4 -1.69 3.5
Schulthe 6.78 -2.34 3.87
3 SIB SAA 7.4 -1.69 3.5
3 SIB TAA -2.86 0.67 4.14
6 SIB SAA 10.63 1.66 6.72
6 SIB TAA 9.0 10.0 13.0

Takeaways

  • If you want a lazy portfolio, go for five or six asset classes – you won’t rebalance that often so having the extra classes isn’t a big overhead.
  • If you want to maximize returns, look for tactical asset allocation – it may be a compromise to have four or five asset classes with tactical asset allocation – historically that has delivered higher returns that buy and hold.
  • Consider using an on-line broker that allows on-click execution of trades at a fixed price – that makes the time and cost overhead low. 

Disclosure: No positions

Source: Three Lazy Asset Class Portfolios