MarketWatch tracks eight lazy portfolios. Each of these simple portfolios consists of three to eleven, low-cost, no-load index mutual funds from Vanguard®. The fund membership and weights in each portfolio remain constant over time. (In theory, this implies that each portfolio would have to be perfectly rebalanced daily. This is not only impractical but also impossible because the fund’s daily NAVs, and hence their new weights, are not known until after the market close.)

Unfortunately, MarketWatch compares lazy portfolios solely on the basis of annualized returns in one-, three-, five- and ten-year periods. Volatility of returns as well as other performance measures are not taken into account. Luckily, Alpholio™ can help – not only does our Basic Portfolio service provide ample statistics, but it also allows for a selectable periodic rebalancing of portfolio positions to their original weights. For the purpose of this analysis, let’s assume a 15-year evaluation period from July 2001 through June 2016, as well as quarterly rebalancing of each portfolio.

Let’s start with the most complex Aronson Family Taxable Portfolio that consists of 11 funds. The following chart shows the cumulative return and related statistics for this lazy portfolio:

The fixed-income portion of the portfolio comprises inflation-protected securities (15%), long-term Treasury bonds (10%) and high-yield corporate bonds (5%). The portfolio’s holdings also include domestic (40%) and foreign (30%) equities.

The alpha and beta of the portfolio were measured against the broad-based U.S. stock market ETF, and not just a large-cap index, such as the S&P 500®. Because high-yield bonds generally have a substantial correlation to equities, it could be expected that the portfolio’s beta would be approximately between 1 – (0.15 + 0.10 + 0.05) = 0.7 and 1 – (0.15 + 0.10) = 0.75, which it was at 0.73.

The key measures of risk-adjusted performance are the Sharpe and Sortino ratios. Unlike the former, the latter penalizes portfolios with a large downside deviation.

Finally, the maximum drawdown measure is the maximum percentage loss of the portfolio value from a peak to a subsequent trough. Given the chosen evaluation period, this typically means a decline in each lazy portfolio’s value from October 2007 to March 2009.

The following chart shows rolling volatility (measured as a standard deviation of two years of monthly returns) and accompanying statistics for the portfolio:

As could be expected, volatility of the portfolio significantly increased during the financial crisis. In general, a good lazy portfolio should maximize returns, minimize volatility, and reduce the magnitude of volatility changes over time.

Similar charts and statistics can easily be generated for all lazy portfolios. They are not published in this post to limit its size. Instead, here is a summary table of statistics:

Portfolio | Annualized Return |
Alpha | Beta | Sharpe Ratio |
Sortino Ratio |
Maximum Drawdown |
---|---|---|---|---|---|---|

Aronson Family Taxable |
6.96% | 0.22% | 0.73 | 0.53 | 0.76 | 42.08% |

Fundadvice Ultimate Buy & Hold |
6.49% | 0.22% | 0.62 | 0.55 | 0.81 | 36.58% |

Dr. Bernstein’s Smart Money |
6.12% | 0.18% | 0.65 | 0.51 | 0.75 | 38.00% |

Coffeehouse | 6.89% | 0.25% | 0.63 | 0.59 | 0.86 | 36.16% |

Yale U’s Unconventional |
7.89% | 0.31% | 0.69 | 0.61 | 0.88 | 42.94% |

Dr. Bernstein’s No Brainer |
6.12% | 0.11% | 0.83 | 0.43 | 0.63 | 44.48% |

Margaritaville | 5.86% | 0.14% | 0.71 | 0.45 | 0.65 | 41.29% |

Second Grader’s Starter |
5.92% | 0.05% | 0.94 | 0.39 | 0.56 | 49.08% |

The Yale U’s Unconventional portfolio had the highest risk-adjusted returns, as measured by the above Sharpe and Sortino ratios. This was likely due to the relatively large positions in REITs and long-term government bonds, both of which benefited from falling interest rates. Please also note that at times, correlation between returns of the REIT and total stock market mutual funds was quite high (which reduced portfolio diversification), as illustrated by the following chart:

The Coffeehouse portfolio had similar characteristics. Compared to others, this portfolio also exhibited the smallest maximum drawdown.

The Fundadvice Ultimate Buy & Hold portfolio had the third best return-to-risk profile, as well as the second lowest maximum drawdown. While bond funds in this portfolio had short and intermediate maturities, its total fixed-income component was significant, as was the case with the previous two portfolios.

For completeness, here are the statistics for lazy portfolios over a ten-year period through June 2016:

Portfolio | Annualized Return |
Alpha | Beta | Sharpe Ratio |
Sortino Ratio |
Maximum Drawdown |
---|---|---|---|---|---|---|

Aronson Family Taxable |
5.94% | 0.01% | 0.75 | 0.46 | 0.65 | 42.08% |

Fundadvice Ultimate Buy & Hold |
5.06% | 0.00% | 0.65 | 0.43 | 0.62 | 36.58% |

Dr. Bernstein’s Smart Money |
5.41% | 0.01% | 0.67 | 0.46 | 0.66 | 38.00% |

Coffeehouse | 6.33% | 0.09% | 0.66 | 0.54 | 0.78 | 36.16% |

Yale U’s Unconventional |
6.85% | 0.10% | 0.74 | 0.52 | 0.73 | 42.94% |

Dr. Bernstein’s No Brainer |
5.64% | -0.06% | 0.83 | 0.41 | 0.59 | 44.48% |

Margaritaville | 4.95% | -0.05% | 0.73 | 0.39 | 0.54 | 41.29% |

Second Grader’s Starter |
5.76% | -0.10% | 0.93 | 0.39 | 0.56 | 49.08% |

Over this shorter evaluation period, the Coffeehouse portfolio had the best risk-adjusted returns, followed by the Yale U’s Unconventional portfolio, and Dr. Bernstein’s Smart Money portfolio that had a slightly higher Sortino ratio and a smaller maximum drawdown than the Aronson Family Taxable portfolio. This goes to show that the ranking of portfolios heavily depends on the analysis time frame.

We hope that this analysis will give investors additional insights into historical performance of lazy portfolios. Of course, there is no guarantee that this performance will be repeated in the future.