Wall Street WARZONE

‘Super-Brain’ Portfolios for Bulls & Bears: 8 Passive Portfolios of No-Load Index Funds Regularly Beating the S&P 500

by Paul B Farrell, JD, PhD
| | 4/21/2010

Want to see inside the mind of a “SuperBrain Investor?” What makes a winner? Simple. Here’s how the legendary money manager Peter Lynch put it in his classic, One Up On Wall Street: “Think like an amateur. If you invest like an institution, you’re doomed to perform like one, which in most cases isn’t very well. If you’re a surfer, a truck driver, a high school dropout, or an eccentric retiree, then you’ve got an edge already.” Get it? The “SuperBrain Investor” thinks like an amateur.

Okay all you crafty irrational investors—here are some of the best of the “Super-Brain Portfolios” from my Lazy Person’s Guide to Investing, the best ones since first introducing them way back in 2002, now being updated daily on DowJones MarketWatch.com. And yes: They’re still as dull and boring and lazy as back then—and the best are still beating the S&P 500 in bull and bear markets, with no timing and no trading!

And guess who’s most interested in the lazy portfolios! A survey of our email responses tells us that although we initially thought these simple portfolios were mainly for passive do-it-yourself Main Street investors, as time passed we’ve discovered that this strategy is actually used by three different kinds of investors, many of whom are Wall Street insiders: First. Passive investors: the vast majority of America’s 95 million investors. Second. Wealth managers & financial advisors for high-net worth individuals. And third. Financial industry pros protecting their own family’s retirement assets.

Yes, they’re all based on the Nobel Prizewinning “Modern Portfolio Theory”

So whichever group of investors you fit in, you’re a perfect candidate for one of these lazy portfolios, and as we do with everyone, we encourage you to create and customize your own version to fit your particular needs. And by the way, if you haven’t yet figured it out from reading about these portfolios over the years, this approach is really nothing more than the good ol’ MPT (“Modern Portfolio Theory”) in action: Simple well-diversified portfolios of less than a dozen low-cost, no-load index funds. Solid long-term asset allocations, with no active trading, you just set them and forget them, let them do the work without tinkering with the asset allocations every year. You just add new money from your regular savings to rebalance and keep building your retirement nest egg.

Warning: Brokers hate this Nobel Prizewinning strategy because they can’t get rich on index funds, no big front-end commissions and annual management fees like with actively-managed funds. But the truth is, once you’re investing the lazy way, you can ignore the other 14,000 funds out there, they are irrelevant. So here are the eight “Lazy Portfolios:”

Aronson’s Family Portfolio: 11 Funds.
Ted Aronson heads up AJO Partners in Philadelphia, managers of $17 billion. No retail funds for the public, just institutional retirement money. I first ran across Ted in a Barron’s interview. He’s one of the rare portfolio managers who is open and honest enough to tell you where his own money is invested. “All of my family’s retirement money is in AJO funds,” says Ted, “but because the fund trades a lot, it’s not suitable for taxable investments. So all our family’s taxable money is in Vanguard’s no-load index funds.” And he’s beating the S&P 500 with 40% in domestic, 40% in international and 20% in fixed income. And he’s sticking with these allocations for the near future.
Vanguard Total Stk Mkt Idx VTSMX 5%
Vanguard 500 Index VFINX 15%
Vanguard Ext Market Index VEXMX 10%
Vanguard Sm-Cap Growth Idx VISGX 5%
Vanguard Small Cap Value Idx VISVX 5%
Vanguard Em Mkt Stock Idx VEIEX 20%
Vanguard Pacific Stock Index VPACX 15%
Vanguard Euro Stock Index VEURX 5%
Vanguard Infl-Prot Securities VIPSX 10%
Vanguard High-yield Corp Bd VWEHX 5%
Vanguard Long-tm U.S. Treas VUSTX 5%

Dr. Bernstein’s “SmartMoney” Portfolio Allocation: 9-funds
Dr. William Bernstein’s Portfolios: 4 & 9 Funds Dr. William Bernstein is the author of the Intelligent Asset Allocator as well as a physician, neurologist and financial adviser in Bend, Oregon. I first saw this portfolio seven years ago in his SmartMoney column. His “SmartMoney: and his “No-Brainer Portfolio” regularly beat the S&P 500.
Vanguard Total Stock Mkt Idx VTSMX 15%
Vanguard Value Index VIVAX 10%
Vanguard Small Cap Index NAESX 5% 
Vanguard Small Cap Val Index VISVX 10%
Vanguard REIT Index VGSIX 5%
Vanguard Emrg Mkt Stock Idx VEIEX 5%
Vanguard European Stock Idx VEURX 5%
Vanguard Pacific Stock Index VPACX 5%
Vanguard Short-term Bond Index VFSTX 40%

Coffeehouse Portfolio: 7-funds
Bill Schultheis was Smith Barney broker for thirteen years, now a financial adviser in Seattle, and author of The Coffeehouse Investor. Bill launched his portfolio in 1999 when Wall Street was betting heavy on tech and dot.coms. They laughed at his 40% bond allocation. But nobody laughed during the bear market of 2000-2002 when his lazy portfolio was beating the S&P 500 by 15% all three years. And it’s so simple: You put 40% in an intermediate bond index and 10% in each of the six stock funds; so it wins in bull and bear markets.
Vanguard 500 Index VFINX 10%
Vanguard Value Index VIVAX 10%
Vanguard Small Cap Index NAESX 10%
Vanguard Small Cap Val Index VISVX 10%
Vanguard REIT Index VGSIX 10%
Vanguard Total Int’l Stock Index VGTSX 10%

Yale U. Portfolio: 5 Funds
David Swensen’s the manager of Yale University’s endowment fund and author of the Unconventional Success, a must-read book. He’s had incredible returns, roughly 16% annually for two decades! However, he warns us that institutional managers have many advantages unavailable to America’s 95 Main Street million investors, which helps him generate that 16% annual average. He recommended a simple five-fund lazy portfolio and it’s been a solid winner, beating the S&P 500 across the board.
Vanguard Total Stock Mkt Index VTSMX 30%
Vanguard Total Int’l Stock Idx VGTSX 20%
Vanguard REIT Index VGSIX 20%
Vanguard Infl-protected Securities VIPSX 15%
Vanguard Short-term Treasury Index VFISX 15%

Dr. Bernstein’s “No-Brainer” Portfolio: 4-funds
Vanguard 500 Index VFINX 25%
Vanguard Small Cap Index NAESX 25%
Vanguard European Stock Idx VEURX 25%
Vanguard Total-Bond Index VBMFX 25% 

Margaritaville Portfolio Allocation: 3 funds
Scott Burns is a popular Dallas Morning News financial columnist and co-author of the bestseller, The Coming Generational Storm, an analysis of the Social Security and Medicare funding crisis. Burns started developing lazy portfolios over 15 years ago. His Margaritaville Portfolio is simple. And it’s beating the S&P 500 in all three time periods.
Vanguard Total Stk Mkt Index VTSMX 33%
Vanguard Total Int’l Stock Index VGTSX 33%
Vanguard Infl-protected Securities VIPSX 33%

Second Grader’s “Starter” Portfolio Allocation: 3 funds
Here’s one we recently added. Kevin Roth was an 8-year-old second-grader. He got a gift from his grandmother and a few hints from his father, Allan, a financial planner in Colorado Springs. It’s a simple portfolio with just 10% in bonds, perfect for someone with a long time horizon and higher risk tolerance.
Vanguard Total Stock Mkt Index VTSMX 60%
Vanguard Total Int’l Stock Mkt Idx VGTSX 30%
Vanguard Total Bond Mkt Idx VBMFX 10% 

FundAdvice “Ultimate Buy’n'Hold” Portfolio: 11 Funds
The FundAdvice.com website has won many awards as one of the best for average investors. This encyclopedia of investor information is the brainchild of financial advisor, money manager and seminar leader Paul Merriman, author of the bestseller, Live it Up Without Outliving Your Money. This well-diversified buy’n'hold index portfolio consistently beats the benchmark S&P 500 in bull and bear markets, and often runs neck-and-neck in the performance arena with the Aronson Family’s 11-fund portfolio above.
Vanguard Dev Mkts Idx VDMIX 12%
Vanguard 500 Index VFINX 6%
Vanguard Intl Val Index VTRIX 12%
Vanguard Sm-Cap Idx NAESX 6%
Vanguard Small Cap Value Idx VISVX 6%
Vanguard REIT Idx VGSIX 6%
Vanguard EM St Index VEIEX 6%
Vanguard Value Index VIVAX 6%
Vanguard Inflation-Prot Inv VIPSX 8%
Vanguard Int-Term US Treas 20%
Vanguard Sh-Term Treas 12%

But which one’s best for you? Actually, any one of these eight is better than wasting time trading and chasing hot stocks and the other 14,000 funds, the vast majority of which under-perform the market every year. In the long run, any one of these portfolios is a better choice for an passive investor than virtually all the other alternatives. What we suggest is that you create your own portfolio using the ideas in here and throughout the book. And for more details, read my book, The Lazy Person’s Guide to Investing, and check their latest performance updated daily at DowJones’ MarketWatch.com.

FirstPubDate: Sept’o9

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