The Right Lazy?

A reader left a comment professing a lack of comfort with country selection and wonders about the following lazy portfolio;

  • 55% Vanguard FTSE All World Ex-US (VEU)
  • 45% iShares Russell 3000 Index Fund (IWV)

The chart compares both funds with the S&P 500 since VEU’s inception.

In its short life VEU, the foreign fund, has had a 0.876 correlation to the S&P 500. In the same time period but less surprising IWV has had a 0.975 correlation to the S&P 500.

Further, VEU and IWV have had 0.863 to each other. This is something I have written about many times in the past, all of the diversification benefits of the component countries gets blended away in a broad based product like VEU.

I think it is clear that VEU quacks a lot like EFA. During the last slow decline, at the start of this decade, EFA offered no protection and during the next slow decline I doubt it or VEU will offer protection either. VEU will likely do better than the US market if the dollar stays weak or gets weaker but the diversification benefits seem non existent to me.

IWV yields about the same as the S&P 500 and while the Vanguard website does not provide the yield for IWV it can’t be much different than EFA which ETFconnect lists at 1.8%.

I am not opposed to the concept of a lazy portfolio but I don’t think all the bases can be covered with four funds, let alone two. I am not sure what the optimal number is but two ain’t it.

Another reader asked if buying foreign stocks that trade on the pinks or bulletin boards is reasonable for a do-it-yourselfer. More and more there will be no choice. Many stocks have left the NYSE and I suppose there will be more.

As the reader notes it is the bulletin board where many foreign blue chips trade. Relative to picking individual stocks picking a blue chip from a foreign country is not the riskiest thing you can do even if it trades on the pinks. The companies report their numbers regularly you just need to work a little harder to access them (go to the company’s website instead of Yahoo Finance). That one of the four or five largest companies on a foreign exchange is going to be a bellwether company that most of the time will be a proxy for its home market is not that difficult to grasp. Getting the timing right, understanding the market and a company’s role in that market are all harder and then figuring how to work it in to your portfolio might be harder still.

Avoiding fraud is not that difficult because it happens so rarely. This says nothing about success to be had but very few stocks go to zero because of fraud and the odds that you would pick one that does are pretty slim.

Needless to say I am thrilled that the Red Sox won the world series again.

My brother Larry said before game one that the Rockies didn’t stand a chance for several reasons. While that type of thought makes me shutter he was correct.

I will say that when Bobby Kielty hit that solo home run in the top of the eighth I knew it was because they would need it which made Garret Atkins two run shot in the bottom of the eighth off of Hideki Okajima a little easier to deal with.

It makes no sense, but somehow I just felt it. Either way, pretty cool.

40 Comments

  1. If “lazy” means that investors get the full benefit of owning securities without the drag of paying for the advice of someone who just rambles on and on each day, then I say go for lazy!

    Reply
  2. Roger, I agree that VEU and EFA don’t offer diversification from the S&P, but what about buying VEU as a core holding instead of SPY? It looks to me like, going forward, you get more upside potential with no additional downside.

    Linda

    Reply
  3. Any one find it interesting that since the Red Sox adopted Sabermetrics that they’ve been a winning team? Also the Indians have adopted it as well, was interesting to see two Sabermetrics teams in the ALCS.

    I find it to be a lot like the market. There is a lot of luck, but probability can’t be ignored.

    Reply
  4. Buffet is always way ahead of his time, by buying time tested winning companies he outperforms everyone else!

    thanks!

    Hanz http://refibayarea.com

    Reply
  5. Roger and fellow blogees, I am considering
    the following “lazy portfolio” and would
    appreciate any criticism. I am looking at
    60 on the horizon, and want about a “3”
    on the 1-5 risk tolerance scale.
    Let me have it! Thanks, Scoot

    BRKA 25% ( 0.17 Beta, US Multinational)
    ADRE 10% (Beta 1.8)
    EFA 10% (Beta 1)
    GLD 5%
    LSBRX 20% (5star bond fund, up 10 straight yrs)
    PPA 10%
    MOO 10%
    XLE 10%

    Reply
  6. Do you have any thoughts about GUR– eastern europe fund. It appears to me that these markets will grow and a narrow fund is the way to go to avoid indiviual stock risk but still drill down to a smaller slice of the foreign market. Also what do you think of using stops in this type of investment. The total invest will be less than 3 per cent of holdings. thanks

    Reply
  7. busy morning, watching the Jim Rogers interview on FT.com, already had a heckle, some spam and some good questions.

    Linda, VEU instead of SPY? the big drawback, assuming you are US based would be if the dollar confounded the fundies and went up.

    billb are you saying my team is run by a bunch of quants? lol

    Scoot, 25% into one stock that might rest on the fate of one person is not where i would want to be. I personally find blending very broad based with narrow based difficult because it becomes difficult to manage sector weightings.

    GUR will probably capture eastern europe but how did you come to that one over RSX or any of the similar CEFs? As far as entering a stop order, how much does it move around day to day? I would assume a product that invests in eastern europe would probably hop around a fair bit? What is the likelihood you get whipsawed? Look at August. Would a stop order have been a good strategy?

    Reply
  8. steve.scoot
    My 2 cents would be that Prec Met/Commod is too volatile to be at 25% (GLD, MOO, XLE)

    Aero/Defense Sector (PPA) at 10% seems risky going forward since a high probility of Democrats controlling Govt spending, which would be aimed at social programs rather than Defense (Health Care maybe?)

    US big cap growth seems to be underweighted, also a bit of technology perhaps, for the long term. Buffet usually avoids tech and is very value oriented.

    I hope my advice hasn’t been too “rambling”

    OG

    Reply
  9. Roger,
    Evidently so. All it will take now is an Asian financial crisis or the price of natural gas to collapse and the BoSox will be in last place. Hopefully the organization will be long puts into the post season to hedge against a fall out. OK, this poor excuse for a joke has gone on too long.

    Anyway, I’m not sure that this qualifies as totally lazy, but I believe someone here posted it sometime ago. It’s called the ultimate buy and hold strategy. He adapted it to ETFs as well. I have a note to begin following it on paper, but haven’t done so yet.

    Reply
  10. My lazy portfolio

    VBK 15%
    VUE 15%
    VOT 10%
    VEU 25%
    ADRE 10%
    XLE 5%
    BIK 5%
    SLX 5%
    ITA 5%
    VWO 5%

    Reply
  11. Thanks for the feedback. There is so much conflicting opinion that one can easily be drinking
    from the fire hydrant (at least me). Roger I found
    your comment about 25% in one stock (even though it is really more like a mutual fund)
    well advised.

    Interestingly, I came across this address
    by Mark Sellers to the Harvard MBA class very interesting, since he seems to favor large investments (20%)in stocks you feel
    strongly about…he also puts these
    wunderkinds in their place. See if you
    don’t find it interesting, at the least.

    http://www.beearly.com/pdfFiles/Sellers24102004.pdf

    Thanks, Scoot

    Reply
  12. Hi Bill B

    Do you have a link to where he has adapted to ETF’s?

    Thanks

    Reply
  13. Why not rsx–didnt want to be invested solely in Russia.

    Reply
  14. This comment has been removed by the author.

    Reply
  15. Andy,
    Try this. I thought there was a clearer page somewhere, but I can’t find it. The ETF Buy and Hold (the last one on the list) is all ETFs.

    Reply
  16. Roger, your mealy mouth comments on diversification remind me of The 3 Stooges (The Professors) singing “B-I-Bi, B-I-Bo” to the adoring class.

    FACT: In the long term(20 years), lazy portfolios of 5-6 positions will win hands down over 85% of mutual fund based portfolios, including your own clients’ portfolios Roger.

    ANALYSIS: Lazy portfolios’ dramatic wins are not difficult to understand:
    1) exorbitant, hidden management fees are minimized,
    2) uninformed stock picking advice is eliminated,
    3) senseless market timing advice is eliminated,
    4) mindless trading is eliminated.

    PROOF: Shall we have a little fun challenging each other in 2008?

    Reply
  17. Bill

    Thank you for link

    Reply
  18. Maybe I would need to be shown in a graphical sense, but I have a tough time buying the fact that Value beats Growth over the long haul. Does anybody have a graph that can show this correlation?

    Thanks

    Reply
  19. Both Steve and Andy’s lazy portfolios are O.K., but they are not buy & hold lazy portfolios.

    I own SLX, and MOO are both good for right now, but they are sector funds. They are by design for traders. Not day traders mind you, but for traders.

    My buy & hold portfolio is:

    DODFX 5% (my only managed fund)
    IOO 10%
    EFA 10%
    VTV 10%
    DLS 10% (Small cap int. is a must)
    SPY 8%
    VWO 8%
    XLE 10%
    XLK 6%
    VO 4% (or VOE if you prefer)
    8% in a bond fund such as BND, BLV, LSBRX or BEGBX.
    VBK 4%
    VTV 7%

    The dividend yields here are as good as I could come up with in the design. The average should be between 1-2% (1.52% now). It is fairly well diversified with a good weighing towards foreign that I think will out perform domestic stocks for at a few years ahead if not more.

    I also chose the ETF’s over the matching index funds because of the lack of restrictions in the ETF’s. For instance Vanguard’s VGENX that is similar to their VDE has a 25k minimum to get in and they charge a 1% redemption fee for selling it before 6 months. If the price of a barrel of oil plummets for any reason I don’t need that hanging over my head.

    I chose XLE over VDE because it has a better yield.

    If you insist on China one could add EEB and FHKCX by trimming down some other funds. Or for a more long term growth portfolio you could trim the bond fund(s) and use that cash for China.

    China will be a bumpy ride for some time, but many think that China is similar to the U.S. economy back in the 1950’s. I wouldn’t say that myself, but some believe it.

    Reply
  20. This comment has been removed by the author.

    Reply
  21. Andy, I can only get 5 years on the Russell Growth and Value index but here they are at least over the last five years. Doesn’t seem like enough difference in that timeframe to speculate which one is better as a rule of thumb.

    Reply
  22. Andy it pretty much is a widely known truism.

    Perhaps the reason it seems counter intuitive is because of some sort of survivorship bias.

    Maybe you are only thinking of the success and not the failures. More growth companies flame out over time.

    Reply
  23. Andy.
    Value almost always outperforms over the long haul. That is why I put 10% into VTV in my buy & hold portfolio that I listed above. I put a lot of time into this portfolio research seeking diversification and yield without fund restrictions.

    Note VTV:

    http://tinyurl.com/2z23mq

    And it has a 2.49 yield. IWN has a 1.85 yield.

    Reply
  24. Anon 2:44

    Thanks for sharing

    Reply
  25. Anon 2:44

    I see you used VBK which is small cap growth vs. VO. Do you feel that small cap is better held as a growth investment vs. Value?

    Reply
  26. Correction:

    I meant why did you use VBK over VB or VBR?

    Reply
  27. Anon 244

    Why do you have VTV twice once showing 10% and another at 7%?

    Thanks

    Reply
  28. Speaking of VTV..I made a mistake in copying my portfolio. I listed VTV twice.

    It should read:

    VTV 10% (total)
    SPY 12%
    VO 7%

    Reply
  29. Andy.
    Sorry but I was away from my computer for a while.

    VBK is a small cap growth fund. It has performed well this year. I also liked the VBR value fund because of it’s high yield of 1.96%. But it has seriously lagged the market. Long term it may be O.K.

    The VO is a Vanguard mid cap holding for more diversification. It has a 1.17% yield. I am trying to capture different aspects of the market.

    They also have a mid cap growth (VOT) and a value fund VOE. Here is their chart and why I chose VO:

    http://tinyurl.com/22cmzh

    It looks similar to the SPY holding in tracking the S&P 500 over the long term and after the recent correction, but has slightly outperformed for the most part on the chart.

    I hope this helps.
    Jack S.

    Reply
  30. Andy.
    I should also have pointed out that I would loved to have used VBR over VBK because of it’s superior yield. VBR has a current yield of 1.96% and VBK is yielding only .36% But look at how much VBR has lagged the market.

    http://tinyurl.com/2alaff

    VBK is up YTD 13.61%. VBR is actually down .34%

    I don’t know why value hasn’t seemed to work in the small cap area here at least for the short term. Maybe Roger can help us find out why.

    The VBK purchase over VBR was among my hardest decisions in putting together my portfolio because of my lean towards both value and yield over the long term.

    I should add that VBK is between value and pure growth. But that doesn’t help my quest for yield any.

    Reply
  31. VBR is small cap value as you guys have said.

    This is late cycle, IMO. If that is correct, small should lag big and the slope of the yield curve should favor growth both of which has been the case.

    Additionally VBR is 32% financials according to ETFconnect.

    From the top down it is not the best time for small cap value and everyone knows that financials have struggled; this would be my guess for the lag of VBR

    Reply
  32. Andy.
    I would also like to add that I left off REITs for the time being. My trading fund is in Fidelity, so I will add FIREX to that portfolio when it looks right to do so since I don’t have to pay for the trade there.

    My buy and hold portfolio is in a Scottrade account. If anyone wants to use my portfolio they may want to add a REIT fund down the road to their’s.

    Venndata.
    Thanks for the link. The first portfolio is a bet too heavy on emerging markets for my taste at the present time. And I think their total for the Vanguard small cap value netting over 12% in the last year may be a bit off. But they look good as well.

    Reply
  33. Not much volume. Someone has been wanting the likes of these.
    iPath DJ-AIG Agriculture Total Return Sub-Index (JJA)
    iPath DJ-AIG Grains Total Return Sub-Index (JJG)
    iPath DJ-AIG Livestock Total Return Sub-Index (COW)
    iPath DJ-AIG Industrial Metals Total Return Sub-Index (JJM)
    iPath DJ-AIG Copper Total Return Sub-Index (JJC)
    iPath DJ-AIG Nickel Total Return Sub-Index (JJN)
    iPath DJ-AIG Energy Total Return Sub-Index (JJE)
    iPath DJ-AIG Natural Gas Total Return Sub-Index (GAZ

    Reply
  34. roger, what’s your thought on microcap? one thought is that it has low correlation with the total mkt..one of the few asset classes that does…or maybe not? Personally, thinking of a fund mgr in rhode island that does the pick’n, micro “value” only. Is the micro ride over, just as consensus has it for small cap value?…and, I do agree with your comment on the latter.

    Reply
  35. Over is not how I really think about it. Just the wrong time in the cycle for SCV to lead. It will lead again, probably starting with the next cycle but at some point.

    As far as micro long term it is a great asset class. I doubt this is a time for micro cap to lead for the same reason but I am not sure. I don’t have any microcap fund.

    lol, on the sox dynasty link. How about we just make it through the parade first?

    Reply

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The Right Lazy?

A reader left a comment professing a lack of comfort with country selection and wonders about the following lazy portfolio;

  • 55% Vanguard FTSE All World Ex-US (VEU)
  • 45% iShares Russell 3000 Index Fund (IWV)

The chart compares both funds with the S&P 500 since VEU’s inception.

In its short life VEU, the foreign fund, has had a 0.876 correlation to the S&P 500. In the same time period but less surprising IWV has had a 0.975 correlation to the S&P 500.

Further, VEU and IWV have had 0.863 to each other. This is something I have written about many times in the past, all of the diversification benefits of the component countries gets blended away in a broad based product like VEU.

I think it is clear that VEU quacks a lot like EFA. During the last slow decline, at the start of this decade, EFA offered no protection and during the next slow decline I doubt it or VEU will offer protection either. VEU will likely do better than the US market if the dollar stays weak or gets weaker but the diversification benefits seem non existent to me.

IWV yields about the same as the S&P 500 and while the Vanguard website does not provide the yield for IWV it can’t be much different than EFA which ETFconnect lists at 1.8%.

I am not opposed to the concept of a lazy portfolio but I don’t think all the bases can be covered with four funds, let alone two. I am not sure what the optimal number is but two ain’t it.

Another reader asked if buying foreign stocks that trade on the pinks or bulletin boards is reasonable for a do-it-yourselfer. More and more there will be no choice. Many stocks have left the NYSE and I suppose there will be more.

As the reader notes it is the bulletin board where many foreign blue chips trade. Relative to picking individual stocks picking a blue chip from a foreign country is not the riskiest thing you can do even if it trades on the pinks. The companies report their numbers regularly you just need to work a little harder to access them (go to the company’s website instead of Yahoo Finance). That one of the four or five largest companies on a foreign exchange is going to be a bellwether company that most of the time will be a proxy for its home market is not that difficult to grasp. Getting the timing right, understanding the market and a company’s role in that market are all harder and then figuring how to work it in to your portfolio might be harder still.

Avoiding fraud is not that difficult because it happens so rarely. This says nothing about success to be had but very few stocks go to zero because of fraud and the odds that you would pick one that does are pretty slim.

Needless to say I am thrilled that the Red Sox won the world series again.

My brother Larry said before game one that the Rockies didn’t stand a chance for several reasons. While that type of thought makes me shutter he was correct.

I will say that when Bobby Kielty hit that solo home run in the top of the eighth I knew it was because they would need it which made Garret Atkins two run shot in the bottom of the eighth off of Hideki Okajima a little easier to deal with.

It makes no sense, but somehow I just felt it. Either way, pretty cool.

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing