Armstrong's Informed Investor Lazy Portfolio Feels The Commodities Pain

04/18/2011 Share 0 comments

The incidents in Japan, the Middle East and even as far back as New Orleans teach us the danger of living on borrowed time, the reactors, the governments the levees keeping things going -- just one more year. The temptation to delay until next time is very seductive until disaster strikes and the cost to repair, dwarfs the cost to prevent. Many working people put off their retirement investing -- just one more year until it becomes a "hair on fire" problem -- which it now is for baby boomers for whom retirement is a near and present danger.

We continue to examine luminary portfolios to see what we can learn and use to further our investment portfolios.

Frank Armstrong, author of The Informed Investor, proposed this portfolio for an MSN Money article. The two key points of the portfolio are that it has four asset classes (US, International, REIT, Bonds) and relies on market indices rather than active management. The portfolio uses index funds because index funds eliminate manager risk. It overweights small-cap stocks as small-cap stocks have historically outperformed large caps stocks. The portfolio has a strong value tilt, based on the theory that, over the long haul, beaten-down stocks will perform better than high-flying growth stocks.

This should be a low cost, well performing portfolio.

The fund selection for testing the strategy is listed below with the ETF alternatives:

• 9.25% in Vanguard Small Cap Value VISVX (SCZ)
• 9.25% in Vanguard Value VIVAX (SPY, IYY)
• 6.25% in Vanguard Small-Cap Growth VISGX (VBK)
• 6.25% in Vanguard 500 Index VFINX (IVW)
• 31% in Vanguard Total International Stock VGTSX (EFA)
• 8% in Vanguard REIT VGSIX (IYR, VNQ, RWX)
• 30% in Vanguard Short-Term Bond VBISX (BND, AGG)

Things to note about the portfolio:

• This is designed as a lazy portfolio with limited rebalancing specified
• 31% in US equities is significant with a mix of large and small cap stocks
• With 70% in equities, this is a growth portfolio
• REIT is possibly underweighted
• There is no commodity asset class

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 6 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent: US Equity: SPY or VTI
Commodity: DBC
Foreign Equity: EFA or VEU
REITs: IYR or VNQ or ICF
Emerging Market Equity: EEM or VWO
Fixed Income: AGG or BND

Portfolio Performance Comparison

A detailed comparison can be found here

Takeaways

• 2010 was a good year for lazy portfolios and as we continue through 2011while equities are still performing well, not having a commodities option hurts returns

• TAA has benefits in terms of being able to stay away from some area such as European equities

• Index funds continue to show good results against managed funds

• Larger asset class plans have the benefit of stability and good returns

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 above are obtained through historical simulation and are hypothetical.  


Symbols: VISVX, SCZ, VIVAX, SPY, IYY, VISGX, VBK, VFINX, IVW, VGTSX, EFA, VGSIX, IYR, VNQ, RWX, BND, AGG, DBC, VEU, ICF, EEM, VWO