November 9, 2008

Lazy portfolios easily beating S&P 500

A while ago I mentioned Lazy Investing. The idea is discussed at the Marketwatch article on lazy portfolios. Simply put the concept of lazy investing is to place your investments into a simple mix of mutual funds. For example the Margaritaville portfolio is made up of 33% each of Vanguard Inflation-Protected Securities (VIPSX), Vanguard Total International Stock Index (VGTSX), and Vanguard Total Stock Market Index (VTSMX).

Lazy portfolios are nice because you are well diversified across different types of investments. They include such things as emerging markets, US large caps, bonds, fixed income, energy, REITs, etc. Plus they are very simple to implement and generally using low expense Vanguard funds.

But how well do lazy portfolios do versus simply throwing all your money into the S&P 500?

The S&P 500 has not done very well in the past few months (thats an understatement). The index is off over 33% from its high earlier this year over 1500. The S&P is even down about 10% for the past 5 year period.

Lets compare the performance of the S&P to a few of the Lazy portfolios over the past 10 year period. Below I look at a few of the lazy portfolios and figure how they've performed for the past 10 years. The performance numbers I'm using here are the 10 year return figures quoted on the Vanguard site as of Oct. 31st.

S&P 500 alone:

Fund Allocation Return
VFINX 15% 3%

Return = 3%

Margaritaville portfolio:

Fund Allocation Return
VIPSX 33% 7.44%
VGTSX 33% 6.16%
VTSMX 33% 3.94%

Combined return has been = 5.8%


Yale University Unconventional Portfolio

Fund Allocation Return
VIPSX 15% 7.44%
VGSIX 20% 12.18%
VUSTX 15% 5.99%
VEIEX 5% 14.40%
VDMIX 15% 1.80%
VTSMX 30% 3.94%


Combined return of = 6.6%

Aronson Family Portfolio

Fund Allocation Return
VFINX 15% 3%
VEIEX 20% 14.40%
VEURX 5% 5.01%
VEXMX 10% 6.93%
VWEHX 5% 3.72%
VIPSX 10% 7.44%
VUSTX 5% 5.99%
VPACX 15% 5.96%
VISGX 5% 8.68%
VISVX 5% 9.77%
VTSMX 5% 3.94%

Combined return of = 7.5%

So while the S&P 500 fund had a 3% return for the given 10 year period, these three lazy portfolios have had returns of 5.8%, 6.6% and 7.5%.

Each of these lazy portfolios is doing far better than the S&P 500 alone. Even a little bit of easy diversification with the Margaritaville portfolio gives you nearly double the return. Now this might be simply due to the S&P performing horribly in the specific time period. But in general thats a good example of yow if you diversify your investments you stand to have a more reliable return. Rather than run the risk of having all your eggs in the one basket that has very bad returns, spread the money around a few places and average out the return. Lazy portfolios are a very simple way to diversify and give you decent return with low volatility.

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