Seven Stock Lazy Portfolio: Q & A

by: Roger Nusbaum

roger nusbaumRoger Nusbaum submits: This is a little follow up to the lazy portfolio post.

A question came in on why no REITs.

First off, maybe there should be -- but this is multi-faceted. One reader noted that REIT exposure would help reduce correlation to the S&P 500. Well, depending on how lazy you want to be you may not want your correlation to be too low. The market goes up the vast majority of the time, and one of the underlying currents to lazy is going along for the ride, generally.

Further I do think that the gold exposure helps out a little bit to reduce correlation. But if you are trying to keep things very simple you are going to have a few gaps.

I think if investors can be a little less lazy and maybe up the number of holdings to a dozen you will fill in a lot of gaps, probably won't hit any home runs, but over long periods of time you'll be pretty close to the market give or take.

Reader TomK called out several things with the lazy portfolio. He noted a big tilt to large cap value and no international small cap, which he thinks is more important than gold/commodity exposure. Fair enough to be sure. As I look at the many LPs that Charles Kirk listed I only see one LP with international small cap. So this seems to stray outside of what most people think of for this type of portfolio.

As far as swapping this for gold -- using WisdomTree International Small Cap (NYSEARCA:DLS) as a proxy for this part of the market it has a 0.60 correlation to the S&P 500 while Gold has a 0.03 correlation. I used client holding GLD as a proxy for correlation, because it has some track record. While I had not thought about international small cap, and can't say it is a bad idea of course, I think the idea of a completely different asset with such a low correlation would be more important to me.

As far as the tilt to value, more than a tilt really, value outperforms growth the majority of the time. More importantly, it reduces volatility a little bit, which I assume that someone who wants a portfolio like this is looking for.