The lazy portfolios are the blazing beacons of passive investing. Once you’ve absorbed all the advice and theory you can stand about risk, cost and diversification, you’re still left with one crucial question:

“What does a simple, low cost, diversified portfolio look like?”

And that’s where the lazy portfolios shine a light. They’re rough-and-ready model portfolios designed by some of the champions of passive investing. Think of the lazies as a show home – a useful source of ideas for building your own portfolio.

A lazy portfolio’s standout features are:

  • Simplicity

You only need a few funds to diversify across the key asset classes. This cuts costs and keeps the portfolio manageable.

  • Low maintenance

You rebalance your funds occasionally, but otherwise leave them to make like an oak tree and grow. Novice investors can start with a very simple portfolio and add new funds from time to time, to further diversify.

  • Low cost

Passive investors use cut-price index funds and Exchange Traded Funds (ETFs) to prevent high fund charges gobbling up their returns.

  • Risk control

Every lazy portfolio sticks a hefty chunk into government bonds. The designers are drawing attention to the power of bonds to cushion your portfolio from equity market crashes. Your eventual allocation to bonds will depend on how much risk you can handle.

  • No silver bullet

The lazy portfolios show there’s more than one way to cut the cake. Different portfolios suit different needs, mindsets and goals. But the truth is they will all put you in roughly the same ballpark. There’s no need to agonise over every percentage point split between asset classes.

You don’t need to pay for black box analytics to spit out some fully personalized “mean variance optimised, risk-calibrated” portfolio. You can just keep things simple and do it yourself.

Life's a beach with a lazy portfolio

Dirty Harry Vs Juliet Bravo

The lazy portfolios you’ll read about on the Internet and in books are mostly US orientated. But Monevator has converted them for UK readers using index funds and ETFs chosen from our market.

Cost rules our decision making. Every fund is selected on the basis that:

  1. It fits the original investment category.
  2. It’s generally the cheapest choice available by Ongoing Charge Figure (OCF) and any other upfront fund fees that apply.1

Translator’s notes

Stars and Stripes flavoured lazy portfolios are skewed towards domestic equities. Historically, American investors have been heavily biased towards the home team, and that makes a certain sense given the size, dynamism, and diversity of their domestic market.

UK investors may want to allocate a greater percentage of their equity allocation internationally, given that UK plc only accounts for about 8% of global market cap and that the FTSE All-Share and FTSE 100 are more concentrated than US equivalents.

When it comes to bond funds, we’ve chosen to make our UK picks less diverse. The US portfolios tend to use a Total Bond Market fund, split about 70% into US Government bonds and 30% into Corporate bonds.

In the UK, Total Bond Market funds are as common as apologetic bankers, so I’ve chosen to use UK Government bond trackers instead.

Why? Well firstly, we’re dealing in lazy portfolios. Secondly, bonds are meant to provide you with some protection against equities being hammered when markets are stressed. Government bonds are less correlated with equities than corporate bonds, and so more likely to do the job.

US lazies often tilt towards value and small-value equity funds. Historical evidence suggests that investing in downtrodden companies of this kind can juice your returns – in exchange for an extra dose of risk, of course.

Yet again the UK market responds with a shrug of the shoulders. There are no corresponding value and small-value trackers over here. The closest proxies are high-yielding dividend funds. Value equities by their very nature tend to pay out a good yield, so many of them are scooped into dividend funds. It’s an ill-fitting suit at best, but it’s what we’ve got.

Finally, for some authentically British home-cooking we’ve rustled up a version of  Tim Hale’s Home Bias – Global Style Tilts 4 portfolio.

Tim Hale is the only British commentator I know of who stands comparison to the black belts of US passive investing. I’d recommend his book to any UK investor.

Okay, let’s go!

1. Allan Roth’s Second Grader Portfolio

Asset class Asset allocation Fund name OCF
Domestic equity 60% Vanguard FTSE UK Equity Index 0.15%2
Developed world 30% Vanguard FTSE Dev World ex-UK Equity Index 0.3%
Government bonds (Gilts) 10% Vanguard UK Government Bond Index 0.15%

Very simple and very aggressive with a 90% equity allocation. One for the young and the brave.

2. David Swensen’s Ivy League Portfolio

Asset class Asset allocation Fund name OCF
Domestic equity 30% Vanguard FTSE UK Equity Index 0.15%3
Developed world 15% Vanguard FTSE Dev World ex-UK Equity Index 0.3%
Emerging markets 5% BlackRock Emerging Markets Equity Tracker D 0.28%
Property 20% BlackRock Global Property Securities Equity Tracker D 0.28%
Government bonds (Gilts) 15% Vanguard UK Government Bond Index 0.15%
Government bonds (Index-linked) 15% Vanguard UK Inflation-Linked Gilt Index 0.15%4

The famed Yale fund manager is heavier in property than most. I’ve switched out the original US domestic property fund for a more diversified global property vehicle. The 50:50 split between conventional bonds and inflation-protected index-linkers is a classic lazy portfolio ploy.

3. Rick Ferri’s Core Four Portfolio

Asset class Asset allocation Fund name OCF
Domestic equity 36% Vanguard FTSE UK Equity Index 0.15%5
Developed world 18% Vanguard FTSE Dev World ex-UK Equity Index 0.3%
Property 6% BlackRock Global Property Securities Equity Tracker D 0.28%
Government bonds (Gilts) 40% Vanguard UK Government Bond Index 0.15%

Ferri’s 60:40 split between equities and bonds is another common convention, broadly indicating a portfolio set for moderate growth and volatility.

4. Bill Schultheis’ Coffeehouse Portfolio

Asset class Asset allocation Fund name OCF
Domestic equity 10% Vanguard FTSE UK Equity Index 0.15%6
Developed world 15% Vanguard FTSE Dev World ex-UK Equity Index 0.3%
Domestic value 10% Vanguard FTSE UK Equity Income Index 0.25%7
Domestic small cap 10% iShares MSCI UK Small Cap ETF 0.58%
Emerging markets 5% BlackRock Emerging Markets Equity Tracker D 0.28%
Property 10% BlackRock Global Property Securities Equity Tracker D 0.28%
Government bonds (Gilts) 40% Vanguard UK Government Bond Index 0.15%

The original portfolio has a 10% allocation to small-value equity, which isn’t available in the UK as a tracker. Schultheis has also said:

If I were creating a portfolio today, I would increase the international allocation and include emerging markets, probably 5 to 7 percent.

So I’ve eliminated small-value, upped the developed world ex-UK by 5% and brought in emerging markets at 5%.

5. Harry Browne’s Permanent Portfolio

Asset class Asset allocation Fund name OCF
Domestic equity 25% Vanguard FTSE UK Equity Index 0.15%8
Government bonds (Gilts) 25% Vanguard UK Long Duration Gilt Index 0.15%9
Gold 25% iShares Physical Gold ETC 0.25%
Cash 25% High interest account

This truly is a portfolio for all-seasons. It’s armour-plated against inflation or deflation, recession, and even the good times. The assets have been picked for their contrasting behaviours, so whatever the conditions, some should thrive even while some dive. William Bernstein has written an excellent article about the permanent portfolio.

Note that the iShares gold vehicle is an Exchange Traded Commodity (ETC), not strictly an ETF.

6. Scott Burns’ Six Ways From Sunday Portfolio

Asset class Asset allocation Fund name OCF
Domestic equity 1/6 Vanguard FTSE UK Equity Index 0.15%10
Global equity 1/6 db x-trackers FTSE All-World ex-UK ETF 0.4%
Global energy 1/6 db x-trackers MSCI World Energy ETF 0.45%
Property 1/6 BlackRock Global Property Securities Equity Tracker D 0.28%
Government bonds (Global) 1/6 iShares Global Government Bond ETF 0.2%
Government bonds (Index-linked) 1/6 Vanguard UK Inflation-Linked Gilt Index 0.15%11

Some unusual choices here, including a global energy fund because Burns believes, “Energy is the ultimate currency and the ultimate commodity.”

This portfolio is also notable for its global government bond allocation. Diversifying away from domestic government bonds holds the prospect of greater returns but more volatility too, as currency risk comes into play.

7. William Bernstein’s No Brainer Portfolio

Asset class Asset allocation Fund name OCF
Domestic equity 25% Royal London UK All Share Tracker Fund Z 0.14%
Developed world 25% Vanguard FTSE Dev World ex-UK Equity Index 0.3%
Domestic small cap 25% iShares MSCI UK Small Cap ETF 0.58%
Government bonds (Gilts) 25% Vanguard UK Government Bond ETF 0.12%

Another simple and aggressive portfolio that’s 75% in equities. Note the straightforward 25% split between asset classes. This is because passive investors understand that there is no ‘correct’ answer to asset allocation.

Fine grain allocations may look impressively scientific but are no more likely to provide a better return than a crude four-way slice of the pie.

N.B. I’ve thrown in alternative solutions for UK domestic equity and government bonds for this one.

8. Harry Markowitz’s ‘In Real Life’ Portfolio

Asset class Asset allocation Fund name OCF
Global equity 50% Vanguard FTSE All-World ETF 0.25%
Government bonds (Gilts) 50% Vanguard UK Government Bond ETF 0.12%

A portfolio based on the oft-told tale that the Nobel Prize winning inventor of modern portfolio theory split his real life portfolio 50:50 between equities and bonds. The All-World ETF offers plenty of diversification in a single fund.

9. Tim Hale Home Bias – Global Style Tilts 4 Portfolio

Asset class Asset allocation Fund name OCF
Domestic equity 9% Vanguard FTSE UK Equity Index 0.15%12
Domestic small value 6% Aberforth UK Small Companies 0.85%
Developed world 15% Vanguard FTSE Dev World ex-UK Equity Index 0.3%
Developed world small cap 6% Vanguard Global Small-Cap Index Fund 0.4%
Developed world value 6% Vanguard FTSE All-World High Dividend Yield ETF 0.29%
Emerging markets 6% BlackRock Emerging Markets Equity Tracker D 0.28%
Commodities 6% ETF Thomson Reuters/Jefferies CRB Ex-Energy TR 0.35%
Property 6% BlackRock Global Property Securities Equity Tracker D 0.28%
Government bonds (Gilts) 15% Vanguard UK Government Bond Index 0.15%
Government bonds (Index-linked) 25% Vanguard UK Inflation-Linked Gilt Index 0.15%13

This is the one portfolio designed from the ground up for UK investors. Hence it’s more internationally diversified. US investors are more than happy to keep most of their chips at home in the world’s number one economic powerhouse.

There is certainly no need to devise a portfolio more comprehensive and complex than this one – a multi-fund portfolio like this can get costly if you’re paying dealing charges.

Hale originally allocated a distinct 3% to domestic small cap and another 3% to domestic value. You can use the options cited in the Coffeehouse portfolio if you want to stick to that prescription.

However, in a departure from my usual passive investing orthodoxy, I’ve thrown in an active investing wild card with Aberforth UK Smaller Companies.

This is a small value fund that’s not terribly expensive, fulfils Hale’s brief, and that I personally use. The truth is that small value funds are active management plays anyway and there’s no law against passive investors using active funds when there are no better alternatives. The Aberforth fund is available as a Unit Trust and an Investment Trust.

Intriguingly, the portfolio includes a wedge of commodities. Hale, like Larry Swedroe (but unlike William Bernstein), believes that commodities have a place in an investor’s portfolio.

Hale thinks that commodities offer diversification value because they are uncorrelated to bonds and equities. Hype and poor predicted returns are why many of the US passive commentators steer clear of commodities.

More Britisher snags with this low-cost take on Hale:

  • The global small-cap fund is inc UK, not ex-UK. It increases small cap exposure a little beyond that intended by the designer.
  • It is possible to exclude the UK by choosing separate US, Euro, and Asian small-cap ETFs. Though it’s too fiddly and expensive to do for my taste.
  •  The All-World High Yield ETF substitutes for world ex-UK value. Again it includes UK, so exposure comments above apply.

Vanguard funds feature heavily in this piece because they are an excellent fund house that have blazed a low-cost trail in the UK. For some alternative choices take a look at the UK’s cheapest trackers and Monevator’s very own Slow and Steady portfolio.

Take it steady,

The Accumulator

  1. Caveat: Sometimes it’s the only choice available, given the paucity of the UK market!
  2. plus 0.5% initial charge
  3. plus 0.5% initial charge
  4. plus 0.1% initial charge
  5. plus 0.5% initial charge
  6. plus 0.5% initial charge
  7. plus 0.5% initial charge
  8. plus 0.5% initial charge
  9. plus 0.1% initial charge
  10. plus 0.5% initial charge
  11. plus 0.1% initial charge
  12. plus 0.5% initial charge
  13. plus 0.1% initial charge

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>


*