Eight 'Lazy Portfolios' to wrestle the now official bear market - MarketWatch

Eight 'Lazy Portfolios' to wrestle the now official bear market - MarketWatch: "'Lazy Portfolios' 8 winners for a bear-recession
Protect your retirement; major indexes crashing far below 2000 peaks
By Paul B. Farrell, MarketWatch
Last update: 7:12 p.m. EDT July 14, 2008
ARROYO GRANDE, Calif. (MarketWatch) 'Lazy Portfolios' 8 winners for a bear-recession
Protect your retirement; major indexes crashing far below 2000 peaks
By Paul B. Farrell, MarketWatch
Last update: 7:12 p.m. EDT July 14, 2008
ARROYO GRANDE, Calif. (MarketWatch) -- Just a big bad bear? Or an angry wolf about to bite America's head off? S&P 500, Dow industrials and Nasdaq composite have all collapsed 20% plus. Will it get worse? Yes.
Fed Chairman Ben Bernanke hints another Bear Stearns ahead. Fannie Mae and Freddie Mac may be insolvent and could leave taxpayers holding the bag on $5 trillion in liabilities.

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You should be afraid. I'll bet you've already lost a lot. Think history folks: Remember the 2000-2002 bear? That took 30 months: Markets crashed, down more than 43%, lost over $8 trillion in market cap. The Dow peaked at 11,722, then dropped over 4,000 points to below 7,500.
This is worse. Why? Because today the Dow's already well below that 2000 peak. The S&P 500 is also below its peak of 1,550. As Reagan might ask: "Are you better off today than eight years ago?" Answer: "No!"
Wake up folks! Let's cut the euphemisms, rhetoric and sweet talk: The stock market's been a loser's game. The truth: The past 8 years Wall Street brokers and fund companies have lost a lot of your money! And inflation makes it much worse. So stop deluding yourself. The market is not just in bear territory, it is crashing below 2000 peaks. Wall Street and the fund industry have been selling you a losing strategy.
And don't say we didn't warn you about playing the market. Six years ago we first introduced the "Lazy Portfolios," during the 2000-2002 bear-recession, before the market hit bottom. One of the portfolios was beating the S&P 500 by 15 percentage points all three bear years.
What are Lazy Portfolios? Just simple, boring versions of a proven Nobel prizing-winning strategy: Well-diversified portfolios of no-load, low-cost index funds that require little balancing and no active trading, yet they're winners in bear and bull markets. And so easy, anyone can set them up.
Keep all this in mind because this bear has a long, long way to go -- down. This meltdown reminds me of the long 1970s recession, during my years at Morgan Stanley helping blue-chips work-out bankruptcies and restructurings. Today it's worse.
Here's what legendary home builder and billionaire investor Eli Broad told Bloomberg News: "This is worse than any recession we've had since World War II ... I do not think things are going to get any better" before we get a new president. How long? Broad says selling off empty homes could take "several years." Now one analyst warns the stocks in Fannie Mae and Freddie Mac are "worthless." Forget what the Treasury Secretary says, he's like the Wizard of Oz, the curtain's been pulled, there's no credibility.
There is good news: As you'll see in the review below, all eight Lazy Portfolios are beating the S&P 500 benchmark over all time periods, one, three and five-years. Yes, they're in negative territory, but the S&P's down much deeper, over 13% the past year. The Lazy Portfolios are beating the S&P by 4 to 12 percentage points. The Margaritaville Portfolio beat the S&P 500 by more than 12 percentage points the past year. And on a five-year basis the top performer, the Aronson Family Portfolio, is beating the S&P 500 by a solid four percentage points annualized.
Here are the overall results from Morningstar research:
Total returns of the 8 Lazy Portfolios
Portfolio Equity % No. of funds 1-year return 3-year annualized return 5-year annualized return
Aronson Family Taxable 70 11 -4.03% 8.30% 11.64%
Second Grader's Starter 90 3 -9.23 7.81 11.01
Margaritaville 67 3 -1.73 8.49 10.93
Yale U's Unconventional 70 6 -3.74 7.03 10.84
FundAdvice Ultimate Buy & Hold 60 11 -2.42 8.07 10.78
Dr. Bernstein's No-Brainer 75 4 -8.06 6.61 9.95
Dr. Bernstein's Smart Money 60 9 -6.24 5.92 8.88
Coffeehouse 60 7 -6.14 4.92 8.49
S&P 500 100 n/a -13.12 4.41 7.58

Aronson Family Taxable
Ted Aronson's AJO Partners manages $23 billion of institutional money. I read about Aronson in Barron's seven years ago. I was struck by the fact that he revealed exactly how he invests his own family taxable money, outside his firm. That's rare among America's 70,000 or so professional portfolio managers. No wonder TheStreet.com called him America's "most honest" manager.
But until recently very few managers would reveal how much they had invested in their own funds. They were afraid you'd find out how rich they were getting even when their funds lost your money. Then a couple years ago the SEC required limited disclosures. Now we know how bad it really is.
Morningstar's Russ Kinnel studied this trend: He discovered that the managers of 47% of U.S. stock funds had nothing invested in their own funds. Nor did 61% of foreign-stock fund managers. Nor 71% in balanced funds. And a whopping 80% of muni fund managers had nothing invested in their own funds. They obviously don't have much faith in their own skills, don't want to risk losing their personal moneys along with yours!
Another fact about Aronson amazed me when I first contacted him: He bought into the first index fund launched by Vanguard in 1976. And today with over 14,000 mutual funds to pick from, including over 1,000 index funds, all his funds are still indexed, and he only needs 11 to build a well-diversified Lazy Portfolio. The other 13,989 plus? Forget 'em!
Here's Ted's famous 11-fund "Lazy Portfolio" winner:
Fund Allocation 1-year return 3-year annualized return 5-year annualized return
Vanguard 500 Index VFINX 15% -13.19% 4.28% 7.45%
Vanguard Emerging Markets Stock Index VEIEX 10% 4.03 25.84 29.24
Vanguard European Stock Index VEURX 5% -11.30 13.60 17.06
Vanguard Extended Market Index VEXMX 10% -11.81 6.11 12.08
Vanguard High-Yield Corporate VWEHX 10% -1.85 3.29 5.04
Vanguard Inflation-Protected Securities VIPSX 15% 15.41 5.64 5.90
Vanguard Long-Term U.S. Treasury VUSTX 5% 12.38 3.68 4.48
Vanguard Pacific Stock Index VPACX 15% -8.84 11.53 15.74
Vanguard Small Cap Growth VISGX 5% -9.56 7.65 12.56
Vanguard Small Cap Value Index VISVX 5% -20.42 1.28 10.28
Vanguard Total Stock Market Index VTSMX 5% -12.55 4.88 8.55
Total portfolio 100% -4.03 8.30 11.64

Margaritaville
But do you need 11 funds for a Lazy Portfolio? No. This is important since every fund has a minimum initial investment and new investors often don't have enough money to buy into 11 index funds. Here's proof you don't need a lot of funds to win big.
The Margaritaville Portfolio from Dallas Morning News columnist Scott Burns is a simple three-fund portfolio trouncing the S&P 500 the past year, thanks in part to a solid 33% in fixed-income securities.
This is great news for new investors starting with a small nest egg: Size does not necessarily mean much bigger returns. In fact, smaller and simpler portfolios may have the "value-added" of increasing your daily "serenity." Besides, Burns little three-funder not only out-performed the other seven Lazy Portfolios in the short term, it's within a point on a five-year basis.
Fund Allocation 1-year return 3-year annualized return 5-year annualized return
Vanguard Inflation-Protected Securities 33.3% 15.41% 5.64% 5.90%
Vanguard Total International Stock Index VGTSX 33.3% -8.06 14.94 18.33
Vanguard Total Stock Market Index 33.3% -12.55 4.88 8.55
Total portfolio 100% -1/73 8.49 10.93

Second Grader's Starter
Same goes for the "Second Grader's Starter Portfolio." Young Kevin Roth was eight-years-old when we first saw his three-fund portfolio. He beat the S&P 500 by over three percentage points, once again proving anyone can set up a winning portfolio with just a few funds, and beat the brokers and the so-called professionals too!
Fund Allocation 1-year return 3-year annualized return 5-year annualized return
Vanguard Total Stock Market Index 60% -12.55% 4.88% 8.55%
Vanguard Total International Stock Index 30% -8.06 14.94 18.33
Vanguard Total Bond Market Index VBMFX 10% 7.23 4.02 3.77
Portfolio 100% -9.23 7.81 11.01

Yale U Unconventional
David Swensen is the megasuccessful manager of the Yale Endowment Fund. His six-fund portfolio comes from his bestseller "Unconventional Success," where he wrote about it to average Main Street investors.
Even with a large 20% allocation in the real estate sector that was hit hard by the subprime mess, his "unconventional" portfolio is still outperforming the S&P 500 by almost 10 percentage points the past year.
Fund Allocation 1-year return 3-year annualized return 5-year annualized return
Vanguard Inflation-Protected Securities 15% 15.41% 5.64% 5.90%
Vanguard REIT Index VGSIX 20% -13.83 4.72 13.80
Vanguard Long-Term Treasury Index 15% 12.38 3.68 4.48
Vanguard Emerging Markets Stock Index 5% 4.03 25.84 29.24
Vanguard Developed Markets Index VDMIX 15% -10.54 12.91 16.61
Vanguard Total Stock Market Index 30% -12.55 4.88 8.55
Total portfolio 100% -3.74 7.03 10.84

FundAdvice.com Ultimate Buy-and-Hold
FundAdvice.com is an award-winning "virtual encyclopedia" offering investors mucho information. Founder Paul Merriman educates average investors with free seminars around the country. He's also got an upbeat book for folks planning retirement: "Live It Up Without Outliving Your Money."
Here's his winning Ultimate Buy & Hold Portfolio, found on FundAdvice. We also reviewed several of his other Buy & Hold portfolios in our Lazy Person's Guide to Investing.
Fund Allocation 1-year return 3-year annualized return 5-year annualized return
Vanguard 500 Index 6% -13.19% 4.28% 7.45%
Vanguard Value Index 6% -19.89 3.34 8.46
Vanguard Small Cap Index NAESX 6% -14.97 4.55 11.52
Vanguard Small Cap Value Index 6% -20.42 1.28 10.28
Vanguard REIT Index 6% -13.83 4.72 13.80
Vanguard Emerging Markets Stock Index 6% 4.03 25.84 29.24
Vanguard Developed Markets Index 12% -10.54 12.91 16.61
Vanguard International Value VTRIX 12% -9.02 15.19 18.91
Vanguard Short-term Treasury VFISX 12% 8.27 4.84 3.39
Vanguard Intermediate-term Treasury VFITX 20% 11.97 5.11 4.00
Vanguard Inflation-Protected Securities 8% 15.41 5.64 5.90
Total Portfolio 100% -2.42 8.07 10.78

Dr. Bernstein's Smart Money
Both the next two portfolios are from Dr. William Bernstein, a financial adviser, neurologist and author of two bestsellers, "The Four Pillars of Investing" and "The Intelligent Asset Allocator." Plus his fascinating new one: "A Splendid Exchange: How Trade Shaped the World."
We first saw the nine-fund version way back in 2000 in his Smart Money column. It's the same today, winning through thick and thin, in bull and bear markets.
Fund Allocation 1-year return 3-year annualized return 5-year annualized return
Vanguard Emerging Markets Stock Index 5% 4.03% 25.84% 29.24%
Vanguard European Stock Index VEURX 5% -11.30 13.60 17.06
Vanguard Pacific Stock Index 5% -8.84 11.53 15.74
Vanguard REIT Index 5% -13.83 4.72 13.80
Vanguard Short-Term Investment Grade Index VFSTX 40% 4.80 4.28 3.40
Vanguard Small Cap Index 5% -14.97 4.55 11.52
Vanguard Small Cap Value Index 10% -20.42 1.28 10.28
Vanguard Total Stock Market Index 15% -12.55 4.88 8.55
Vanguard Value Index 10% -19.89 3.34 8.46
Total portfolio 100% -6.24 5.92 8.88

Dr. Bernstein's No-Brainer
Dr. Bernstein's attitude about long-term investing is the perfect attitude for all investors: "I really don't pay that much attention to these portfolios. I'm comfortable with them in the long run. I'll stick with them."
Why not, he's beating the S&P 500 on a one-, three- and five-year basis with absolutely no tinkering, with both the nine-fund and this four-fund version from his EfficientFrontier.com Web site.
Fund Allocation 1-year return 3-year annualized return 5-year annualized return
Vanguard 500 Index 25% -13.19% 4.28% 7.45%
Vanguard European Stock Index 25% -11.30 13.60 17.06
Vanguard Small Cap Index 25% -14.97 4.55 11.52
Vanguard Total Bond Market Index 25% 7.23 4.02 3.77
Total Portfolio 100% -8.06 6.61 9.95

Coffeehouse
Same goes for financial adviser Bill Schultheis's Coffeehouse Portfolio, which we first saw in his book, "The Coffeehouse Investor." Here again, as with the Yale Portfolio, the real estate exposure hurt the past year. Nevertheless, the portfolio's still beating the S&P 500 across the board.
And remember it was the Coffeehouse that beat the S&P by 15 percentage point all three years during the big 2000-2002 bear/recession, about the time I first ran across Schultheis's fabulous work on his CoffeehouseInvestor.com Web site.
Fund Allocation 1-year return 3-year annualized return 5-year annualized return
Vanguard 500 Index 10% -13.19% 4.28% 7.45%
Vanguard REIT Index 10% -13.83 4.72 13.80
Vanguard Small Cap Index 10% -14.97 4.55 11.52
Vanguard Small Cap Value Index 10% -20.42 1.28 10.28
Vanguard Total Bond Market Index 40% 7.23 4.02 3.77
Vanguard Total International Stock Index 10% -8.06 14.94 18.33
Vanguard Value Index 10% -19.89 3.34 8.46
Total portfolio 100% -6.14 4.92 8.49

The bull's dead. And this bear will be growling for a long time, thanks to the huge problems simmering all over Wall Street and Corporate America, at the Fed and now deep in giants like Fannie Mae and Freddie Mac.
Do you have any alternatives? Forget active trading. Don't risk your nest egg on that guaranteed loser's game. Long-term research proves you'll lose money, thanks to taxes, transaction costs and bad calls.
Your best bet, trust the Nobel economists who teach us the principles of Lazy Portfolios, simple, well-diversified portfolios of just three to 11 no-load, low-cost index funds that invariably beat the market with no market timing, no trading, little maintenance and virtually no rebalancing. Check these eight, then customize one that works for you.