So Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Monday July 3, 2023. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Lazy Portfolios Review

MyPlanIQ has monitored so called ‘lazy portfolios’ for more than a decade. Similar to our long term belief that index stock funds usually have inflation beating average returns if held for a long term (see our previous newsletter  Low-Cost Stock Index Funds: Quality ‘Business Conglomerates’ for Solid, Low-Risk Long-Term Returns), lazy portfolios suggested by various guru investors do have a place for many average investors’ long term investments. In this newsletter, we review some of these lazy portfolios. 

Lazy portfolios: global or US centric allocations

The following are the asset allocations of  a few of famous lazy portfolios. Notice there might be multiple holdings in a major asset class. 

Portfolio Name US Stocks Intl Stocks Em Stocks REITs Bonds Commodities
P David Swensen Yale Individual Investor Portfolio Annual Rebalancing VTSMX 30% VGTSX 15% VEIEX 5% VGSIX 20% VIPSX 15%  
Harry Browne Permanent Portfolio VFINX 25%       VUSTX 25%  
CASH 25% GLD 25%
Scott Burn`s AssetBuilder DFA Model Portfolio 09 DFLVX 7% DFIVX 6% DEMSX 6% DFREX 8% DFGFX 20% DBC 7%
DFFVX 6%      
Rick Ferri Core Four Lazy Portfolio VTSMX 36% VGTSX 18%   VGSIX 6% VBMFX 40%  
Israelsen 7Twelve Portfolio VV 8.37%
IJH 8.33%
VIOO 8.33%
VEA 8.33% VWO 8.33% VNQ 8.33% BND 8.33%
VTIP 8.33%
CASH 8.33%
BNDX 8.33%
DBC 8.33%
VBINX (Vanguard Balanced Index Inv) VTSMX 60%       VBMFX 40%  


What we can see in the above is that guru investors can have various opinions on asset allocations. Among them, some are very diversified: Israelsen 7Twelve Portfolio and Scott Burn`s AssetBuilder DFA Model Portfolio 09 are two most diversified. They both have sizable exposure to US stocks and commodities. Both also have more refined exposure in US stocks and bonds. 

Harry Browne Permanent Portfolio is perhaps the most famous and simplest ‘alternative’ asset allocation portfolio that has very aggressive allocations to gold (GLD) and long term Treasury bonds (VUSTX). 

On the other hand, Rick Ferri Core Four Lazy Portfolio and VBINX are US centric. Long time readers should notice that VBINX is MyPlanIQ’s default benchmark for our moderate allocation portfolios. 

The variations represent various believes on how to utilize assets for better returns and risk management. For example, Harry Browne is famous for his four pillar asset theory to cover the following four major economic situations/conditions:

What were hot are cold in the past decade

Well, when we started to monitor these lazy portfolios in 2010-2012, the ‘alternative’ assets such as commodities and foreign stocks and bonds had outperformed US stocks in the previous decade. The following table compares how these lazy portfolios have done for the past decade:

Lazy Portfolio Returns (as of 6/2/2023):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
P David Swensen Yale Individual Investor Portfolio Annual Rebalancing 5.7% -1.7% 5.2% 6.1% 6.8% 6.6%
Harry Browne Permanent Portfolio 6.0% 1.0% 2.0% 5.5% 4.9% 5.6%
Scott Burn`s AssetBuilder DFA Model Portfolio 09 2.6% -5.4% 6.0% 1.3% 2.0%  
Rick Ferri Core Four Lazy Portfolio 7.7% 0.2% 6.1% 5.7% 6.2% 5.9%
Israelsen 7Twelve Portfolio 3.2% -2.7% 6.7% 4.8% 4.9%  
VBINX (Vanguard Balanced Index Inv) 8.8% 4.9% 8.1% 8.0% 8.2% 7.5%

**: NOT annualized


Major asset returns

Asset/ETF Names YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
VTI (Vanguard Total Stock Market ETF) 12.2% 5.2% 13.3% 10.7% 11.9% 9.8%
VNQ (Vanguard REIT ETF) 1.4% -10.6% 6.2% 5.5% 6.1% 5.9%
VEA (Vanguard FTSE Developed Markets ETF) 10.4% 6.4% 10.7% 4.8% 5.8% 3.2%
GLD (SPDR Gold Shares) 6.7% 3.8% 3.6% 8.1% 3.1% 5.1%
VWO (Vanguard FTSE Emerging Markets ETF) 3.6% -5.0% 4.0% 0.7% 2.6% 1.1%
BNDX (Vanguard Total International Bond ETF) 4.0% 0.5% -2.0% 1.1% 2.2%  
BND (Vanguard Total Bond Market ETF) 3.3% 0.3% -2.6% 1.6% 1.8% 2.9%
TLH (iShares 10-20 Year Treasury Bond) 5.0% -3.4% -9.2% -0.1% 1.0% 3.3%
CASH (CASH) 2.0% 3.2% 1.1% 1.2% 0.7% 0.5%
DBC (PowerShares DB Commodity Tracking ETF) -7.9% -22.4% 24.2% 5.7% -0.9% -3.5%

What to do?

The above results are somewhat discouraging: the more diversified, the worse the portfolios return. Furthermore, many portfolios that were designed to take advantage of global economy expansion were clearly hurt: after all, the US stocks are clearly the leader among all of the major assets by some large margins, as can be seen in the above table. 

We give the following several responses. 

The first is, surprisingly, to do nothing. After all, a lazy portfolio is designed to be a very long term investment. The vary long term means at least 20 years or even longer. For example, if we compare the US stocks (VFINX), international stocks (VGTSX) and emerging market stocks (VEIEX) using index mutual funds as they have longer history from 2000, we see the following:

It can be observed that the emerging market fund VEIEX showed comparable returns to VFINX, which represents US stocks and the S&P 500 index. Surprisingly, until 2020, emerging market stocks outperformed VFINX, especially if the investment was made starting from 2000. Over the past 20 years (or 10 years), there has been a significant shift in fortunes. However, the question remains: can we accurately predict what will happen in the next 20 years?

Our second response is that we must thoroughly understand and have realistic expectations regarding our portfolios and investments. This implies being fully prepared for extended periods of underperformance, which can last for 10, 20, or even 30 years. If accepting this psychologically is challenging, there are several options available:

  1. Focus on domestic assets. For US investors, this would mean adopting a strategy similar to VBINX or Rick Ferri’s approach. However, choosing this path requires being ready for potential disappointment when US assets underperform compared to other assets. Prior to 2010, for example, US-centric investors were discouraged by the outperformance of global assets. On the other hand, this disappointment will be somewhat mitigated by the fact that most individuals in your country will likely face similar challenges.

  2. Consider tactical asset allocation. These portfolios are designed to capture the returns of top-performing assets. However, even these portfolios are susceptible to suffering when a single asset performs well while others are highly volatile. This scenario has occurred over the past decade, where international and emerging market stocks experienced fluctuations that led to false momentum starts. In other words, tactical or dynamic allocation is not foolproof, and investors need to be fully prepared for periods of weak performance.

  3. Ultimately, one should treat lazy portfolios (a type of strategic asset allocation) and tactical or active allocations as different forms of diversification. Combining or diversifying between various allocation strategies will not guarantee immediate investment success, but it can lead to a smoother journey and, over time, increase the likelihood of achieving positive outcomes.

It is crucial to reiterate that when referring to the long term, we generally consider a period of no less than 20 years. Indeed, “long term” truly means a substantial amount of time. Unfortunately, that is the nature of investing—it requires a long-term perspective and it’s a long-term game.

Market overview

With almost all (99%) of S&P 500 companies having reported Q2 earnings, corporate America has shown its resilience: the blended earnings decline for S&P 500 is -2.1%, much better than the previously expected decline -6.7% on 3/31/2023 (see Factset). On the other hand, job reports on last Friday gave some conflicting signals: the payroll survey (i.e. survey from companies and government agencies) showed a still strong hiring practice while household survey showed a rising unemployment. The unemployment rate rose to 3.7% from previous 3.4%. With interest rates being high and banks having been forced to tighten their lending due to their balance sheet mismatch (holding too much long term bonds), the US economy is probably not as rosy as the stock market shows. 

As always, we call for staying the course which is guided by the well defined and sound strategic and tactical strategies:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or preferably much longer given the current high valuation. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later and preferably many more years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation has dropped and now valuation is becoming less hostile. However, it is still not cheap by historical standard. For the moment, we believe it’s prudent to be extra cautious. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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