All Weather, Lazy and Couch Potato Retirement Portfolios
February 4, 2009 by Mr. GoTo
Filed under Investing for Retirement
I am a student of asset allocation strategies. More particularly, I am interested in retirement portfolios that can perform well in all market conditions. Sometimes these are called “all weather”, “set and forget”, “lazy man” or “couch potato” portfolios.
Introduction to Lazy Man and Couch Potato Portfolios
The important feature of all-weather or permanent portfolios is that they are designed such that changes in allocations are not required. Instead, using a selection of different asset classes that are not correlated, an investor can sit tight under most market conditions with a reasonable expectation that at least some of the asset classes in the portfolio will show positive (or substantially less negative) market returns. By “not correlated” I mean that one asset class will not move in the same direction and at the same time as another asset class.
Lazy man or couch potato portfolios are therefore different from target date retirement funds. Target funds actually re-balance each year as the pre-determined retirement target date approaches. This also a lazy way to manage a portfolio but in my opinion it is not the best way. To me, the evidence supporting the merits of a constant decrease in equity percentage in your portfolio is underwhelming.
The Ten-Speed Couch Potato Portfolio
I use an all weather portfolio in my 401(K) account. It is based on the 10 Speed Portfolio devised by Scott Burns. As you can tell from the name, it contains ten different asset classes which I have implemented using a combination of nine low cost Vanguard mutual funds and ETF’s and one other ETF (BWX). Burns has put together a number of other lazy portfolios, with fewer distinct asset classes included.
I selected the 10 Speed Portfolio because of its diversity, including inflation protected securities and foreign treasury bond funds. I also did a lot of research on the theory behind the use of each of these different asset classes. Ibbotson Associates has published a lot of research in this area, some of which you can look at on Morningstar’s site. I have also reviewed some of the work of Craig Israelsen, Ph.D. who is very active in the area of retirement investing and asset allocation.
The 10 Speed Portfolio did not do particularly well in 2008 compared to some of the other lazy man portfolios. Fortunately, we have investments outside that portfolio that helped minimize the overall damage to our retirement nest egg, including I-Bonds and additional inflation protected securities.
The Harry Browne Permanent Portfolio
The Permanent Portfolio is relatively unknown compared to may other lazy man portfolios. It was developed by Harry Browne (now deceased) who was a renowned libertarian. His theory was simple. Own 25% gold, 25% U.S. stocks, 25% Treasury bonds (long bonds), and 25% cash. These allocations are based on different economic conditions, some being extreme. I am planning on studying this more because this is supposedly “fail safe” investing. I am not so sure when it has 25% gold as an investment component.
A good source of information on this permanent portfolio can be found at Crawling Road. There is also a mutual fund (PRPFX) loosely based on the Harry Browne Permanent Portfolio.
Final Thoughts on Lazy Man Portfolio Investing for Retirement
I continue to be a believer in set-and-forget retirement investing for the most part. However, I will keep researching and investigating different options in retirement portfolio allocations. Fortunately, there are a number of different tools available for analyzing different portfolios.
Image credit: Craig Jewell
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It was Scott Burns columns that years ago convinced me to pay off my mortgage (because the combination of capital appreciation and “shelter services” almost equaled stock market returns with no risk) and also to diversify my portfolio among not only U.S. stocks and bonds but to include foreign, emerging market, REITs and TIPS. I’m also a fan of John Bogle, late of Vanguard, William Bernstein, author of The Four Pillars of Investing, and, most recently, Craig Isrealsen with his 7Twelve portfolio. That being said, there is a common thread through all of their study and research: Diversify amongst asset classes tilting more toward equities when you are young and more toward bonds the older you get. As John Bogle once said, you could do a whole lot worse than putting half your money into a Total Stock Market Index fund and the other half into a Total Bond Fund, rebalance once a year and let it stay that way forever.