Collective Wisdom of the Lazy Investors

 

I am a firm believer of low-cost diversified portfolios for long-term investing as this approach is backed by decades of empirical evidence and financial research. However, constructing our own diversified portfolio tailored to our investing preference and risk profile can be a challenging task. It involves meticulously identifying the suitable allocation to asset classes, geographical regions, and even the appropriate level of factor exposure. Questions like, "What percentage of my portfolio should be allocated to US small-cap value stocks?" can leave many investors scratching their head.

Fortunately, many great investors and portfolio managers have developed a plethora of potential portfolios including Ray Dalio's All Weather Portfolio and Harry Browne's Permanent Portfolio that you may have heard of. A valuable resource in this regard is LazyPortfolioETF.com, a repository of over 100 "lazy" portfolios that can be easily implemented using a few ETFs and are designed to cater to a wide range of investment philosophies.

While the website is like a treasure trove for those seeking an investment strategy that aligns with their views and goals, the sheer number of portfolios on the website can be overwhelming. In this blog post, I will attempt to crunch some numbers and summarise the key recommendations these portfolios offer.

To maintain brevity in this blog post, I will concentrate on the Very High Risk portfolios, which are better suited for younger investors with a long investment horizon and a high risk tolerance.

Distribution of Asset Class Allocation for Very High Risk Portfolios

Note: the blue dashed lines indicate the median allocation of the respective asset classes across the lazy portfolios. They do not sum to 100%.

When we delve into the asset class recommended by the lazy portfolios, they typically advocate a mix of asset classes including equity, bonds, alternative (e.g. Real Estates) and commodities. As these asset classes tend to perform differently at different stages of the investment cycle, they serve to diversify risks and enhance long-term returns. Notwithstanding, equities comprise a large part of many lazy portfolios, with a median allocation of 75.5%.

The median bond allocation stands at around 20%, with majority of the portfolios recommending a mix of short, intermediate and long-term bonds such as Vanguard Total Bond Market ETF and iShares TIPS Bond ETF.

Both the Real Estate And Commodity asset classes have a median allocation of 10%, but it should be noted that only 30% and 15% of the portfolios recommended these two asset classes, respectively.

Geographical Distribution of  Equities for Very High Risk Portfolios

Geographical allocation is another crucial aspect of these portfolios. On average, the lazy portfolios tend to lean heavily towards the US market, reflecting the robust and historically strong performance of US equities. However, there is also a noteworthy allocation to international markets, underscoring the relevance of global diversification (see my earlier blog post on why we may not want to exclude ourselves from the international market).

Factor Allocation of  Equities for Very High Risk Portfolios

Factor exposure, a relatively advanced concept in portfolio construction, is also considered by these portfolios. They aim to capture various factors like size and value, which can influence portfolio performance. Understanding factor exposure can provide investors with a more nuanced perspective on the strategies they choose. Although small-cap and value stocks tend to be associated with higher risk premium, it is interesting to note that portfolios recommending their inclusion tend to cap the allocation at a relatively modest range of around 5 to 15%. The cautious allocation is likely aimed at curbing portfolio volatility as small-cap value stocks tend to be more volatile.

Combining the wisdom of the lazy portfolios, we learn that for a high-risk portfolio, it is generally recommended to give a greater weightage to equities, primarily because they serve as the growth engine. At the same time, we should diversify into other asset classes to smoothen volatility. Within equities, US market is preferred. This echoes the belief of luminaries like Jack Bogle and Warren Buffet, who have professed that the US market suffice as a core investment. Although many of the portfolios also acknowledge the importance of international diversification, mostly into other developed markets, with a modest exposure to emerging markets. Lastly, portfolios that recommend factor investing typically advocate a small exposure to enhance return while capping their volatility.

On a personal note, I adhere to a globally diversified portfolio with a limited factor exposure. But given my age and risk tolerance, I've opted for a minimal allocation to bonds as I don't think I need much bond position at this stage. I also have reservation about real estate and commodities, especially for the latter which i see it as a speculative play rather than a long term investment.