Bernstein No Brainer and Smart Money Lazy Portfolios Under The Microscope

04/15/2011 Share 0 comments

Retirement investing is now a "hair on fire" problem for Boomers who have no time to waste in getting their portfolios in order. The challenge is how to avoid being overwhelmed with conflicting data and shutting down.

We present simple approaches to understand the path to higher returns with lower risk.

Dr. William Bernstein is the author of the "Intelligent Asset Allocator" and "The Four Pillars of Investing." He's also a physician, neurologist and financial adviser to high-net-worth individuals. He has proposed a number of lazy portfolios. There are two that we now examine in the light of a more active benchmark which has monthly instead of annual rebalancing.

1. The smart money portfolio

2. The no-brainer portfolio

The no-brainer portfolio comprises the following fund allocation:

• 25% in Vanguard 500 Index VFINX (IVW)

• 25% in Vanguard Small Cap NAESX or VTMSX (VB)

• 25% in Vanguard Total International VGTSX or VTMGX (EFA, VEA)

• 25% in Vanguard Total Bond VBMFX or VBISX (BND)

Things to note about the portfolio:

• Heavily weighted towards domestic equities

• Similar to a three asset SIB [simpler-is-better] with domestic, international and fixed income
  

• It would be better to have some REIT or emerging markets exposure

The smart money portfolio comprises the following fund allocation:

• 40% Vanguard Short Term Investment Grade VFSTX (SCJ, SHY)

• 15% Vanguard Total Stock Market VTSMX (VTI)

• 10% Vanguard Small Cap Value VISVX (VBR)

• 10% Vanguard Value Index VIVAX (VTV)

• 5% Vanguard Emerging Markets Stock VEIEX (VWO)

• 5% Vanguard European Stock VEURX (VEU)

• 5% Vanguard Pacific Stock VPACX (VPL)

• 5% Vanguard REIT Index VGSIX (RWX, VNQ)

• 5% Vanguard Small Cap Value NAESX or VTMSX (VB)

To summarize:

• 40% in U.S. equities

• 10% in international equities

• 5% in emerging market equities

• 5% in REITs

• 40% in fixed income

The smart money portfolio is more conservative and has two more asset classes but they only represent five percent of the portfolio each. With 80% of the portfolio in US and fixed income, it isn't very different from the no brainer portfolio.

We are going to use the SIB (Simpler Is Better) Portfolio as a benchmark. The SIB comprise – market index funds (ETFs or Mutual Funds) from key asset classes that can be used to measure historical returns to show the impact of asset class selection rather than fund or stock selection. We are going to use a six asset ETF SIBs. This will enable us to see the type of returns we can expect and contrast Mutual Funds and ETFs

The following funds are used:

The strategic asset allocation strategy has 40% in fixed income and 12% in the other five funds.

The tactical asset allocation strategy has 40% in fixed income and 30% in the top two asset class funds determined by the price momentum -- unless that performance is below fixed income when the money will be diverted to fixed income. If fixed income is performing below cash, the fixed income portion will be cash.

Portfolio Analysis

full chart

Takeaways

• Both Bernstein portfolios perform satisfactorily for a lazy portfolio – it is surprising that the no-brainer performs so well against its more diversified smart-money cousin
• The Six Asset SIB buy and hold outperforms both Bernstein portfolios based on broader diversification.
• Tactical Asset Allocation reduces downside risk and that wins in the current uncertain environment

Symbols: BND, DBC, EFA, IVW, NAESX, RWX, SCJ, SHY, VB, VBR, VEA, VEIEX, VEU, VEURX, VFINX, VFSTX, VGSIX, VISVX, VIVAX, VNQ, VPACX, VPL, VTI, VTMGX, VTMSX, VTSMX, VTV, VWO

Disclosure:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned