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.
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:
- It fits the original investment category.
- 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
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
- Caveat: Sometimes it’s the only choice available, given the paucity of the UK market! [↩]
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Comments on this entry are closed.
Hiya!
I have a question regarding the ability of many ETF managers to “lend out securities” or/and engage in the use of “Financial Derivative Instruments”.
Is this in any way a cause for concern when looking at standard ETFs (iShares FTSE 100 UCITS ETF or Vanguard FTSE Emerging Markets UCITS ETF).
I slightly confused here because I thought ETF providers like Blackrock and Vanguard had to physically replicate these indices…
Thanks!!!
Hi Mr Smith,
Sadly that’s not a straightforward question to answer. Our best effort is this table. The accompanying notes underneath can help you clarify which option may be best depending on your situation:
http://monevator.com/compare-uk-cheapest-online-brokers/
Hi James, nobody has to physically replicate the indices. Each provider will give you some sense of their methodology and even those who physically replicate will usually have caveats enabling them to use derivatives for certain purposes. Physical replicators may also lend out securities (again this information should be available) which exposes you to counter-party risk i.e. the chance that the short sellers default rather than make good the loan. This isn’t just an issue for ETFs. Any fund provider can do it – it’s a pretty common practice. Even some brokers do it with individual shares you might own. If you’re concerned then question your providers on their policies. Some firms don’t do it.
Thank you!
Also, as someone who has only recently been looking more actively at personal investing, I find this website incredibly helpful and have yet to find a better information tool / passive investing forum out there! Thanks very much!
James
HELP – My wife and I are 39 and from the UK and have just paid off our mortgage in full. We now intend to focus on investing for our future and are looking to invest between £2000 and £2500 per month for the next 15 years to enable us to both retire at 55. The purpose of our investment pot is to live on between 55 and 65 until we can access our company pensions (1 NHS and 1 final salary). We are aiming to have a continual passive income of £25K per year.
Initially we were investing in Vanguard life strategy 80/20 (Equity/bonds) but after reading about Ray Dalio’s all weather portfolio became concerned about the high level of risk exposure and volatility. This fund does well in the good times but could potentially make significant losses i.e 2008 crash. His argument to build a defensive portfolio to make modest returns in line with the market but minimise loss seems to make a lot of sense. Ray’s recommended asset allocation is
Stocks 30%
Intermediate US Bonds 15%
Long term US Bonds 40%
Gold 7.5%
Commodities 7.5%
I’ve been struggling to work out how to convert this US allocation into a UK equivalent but have come up with the following.
* Fidelity Index World Fund P (GB00BJS8SJ34) OCF 0.12% (30%)
* Vanguard UK Gov Bond Index (IE00B1S75374) OCF 0.15% (15%)
* Vanguard UK Long-Duration Gilt Index fund (GB00B4M89245) OCF 0.15% (40%)
* iShares Physical Gold ETC (IGLN) OCF 0.25% (7.5%)
* Lyxor Commodities Thomson Reuters/CoreCommodity CRB TR ETF (CRBL) OCF 0.35% (7.5%)
I’ve looked at the performance of commodities and they seem pretty terrible (just a sea of red) which makes me question why I would want to add this almost certain drag to my portfolio but clearly Ray knows more than I do. What are your thoughts?
I’m trying to keep fees as low as possible and was planning to hold the portfolio in ISA’s
I was also looking at Halifax fixed fee platform due to its low £12.50 annual ISA charge and hoping that I could purchase these funds as regular investments (£2 per trade)? I would then just re balance once a year to keep to my desired allocation.
Should I consider a different asset allocation?
Is Halifax the most suitable platform for my needs?
Am I over complicating and should I just go for the more conservative Vanguard Life strategy (60/40) Equity/bonds OCF 0.22?
Many thanks
Craig 🙂
@Craig — I’m not quite sure if you’re positioning this as a modest aim, but please understand it’s not — market returns with lower volatility (/drawdown) is the Holy Grain! 🙂 I would question whether it’s a reasonable expectation for a passive investor. (To be clear I think 99% of active investors will fail at such an aim, too, but at least they may mathematically pursue it.)
I’d suggest one is better off accepting lower than market returns as the price of lower volatility, and choose your investments to suit your risk tolerance accordingly.
As for commodities, I can’t give personal advice on this (or anything!) but I would say that the fact it’s showing red per se is not a reason to avoid an asset class. All assets experience drawdowns from time to time. If nothing is doing poorly you’re probably not diversified. 🙂
With that said I think many / most retail commodity products to-date have structural disadvantages for long term holding. The exception is gold; that’s a commodity in a class of its own really though. (Eg You can’t exoect it to move like base metals with the economy.) The nature of gold makes passive holding via paper or nominated ownership pretty easily achievable.
I’d suggest keep reading around this site. Have a look at Passive Investing under the Investing tab. We have literally hundreds of articles that could be interesting to you. Good luck!
Hi,
First of all, I would love to express my gratitude for your work and specifically for this post. I find it very helpful and useful and have been coming back here multiple times over the years.
Correct me if I’m wrong though, it looks like you haven’t updated this since “JULY 23, 2013”. So, assuming that the strategies here are all solid because of the long term view of the portfolios, I was wondering if the products/funds used, should be updated considering the new options available for the UK market, as many new index funds are now available.
Also, something that is missing and it would be useful is a view (historical performance) of what these portfolios (or portfolios with similar composition) are capable of in terms of returns.
Also, separate question, do you think that fully passive portfolios are the most effective solutions for the long term? Specifically, in categories like Emerging markets, Japan, Small Cap or Bonds, where there is less consistency in long term returns and fewer index funds available, would it be better to pick some good active funds to complement the strategy?
Best Regards
@Gio — Glad you’ve found the site useful. 🙂 Sensible and well thought out asset allocations can be expected to deliver similar results over the very long-term… where they’ll differ is in volatility and maximum drawdowns (declines), and how much of that you can put up with is a personal matter in practice (your risk tolerance) where you’ll trade higher returns for lower risk.
Of course because small differences matter a lot over 30-40 years some particular mix will do best, but it’s impossible to know which in advance (so I’d be very wary of looking at back tests and saying this or that one did best so will again). It’s really a matter of finding the portfolio and strategy that makes most sense to you, and sticking with it.
These two posts might be worth a read:
https://monevator.com/weekend-reading-return-and-volatility-data-for-the-us-lazy-portfolios/
https://monevator.com/costs-trump-the-best-asset-allocation-decisions/
@ Gio – thank you so much for your kind comments.
This page is the one I update regularly with new trackers:
https://monevator.com/low-cost-index-trackers/
Haven’t done it in over a year due to the book writing but the products here will put you in the right ballpark.
This page could also be worth your while as it shakes out the in-built US bias of the 9-lazy portfolios that then became a UK bias:
https://monevator.com/asset-allocation-types/
Performance-wise, you can test how most of those portfolios have done using this incredible site: https://portfoliocharts.com/portfolios/
Do you ever look at the these lazy portfolios and assess performance over time etc ?
thanks
Certainly interesting and useful stuff which I have returned to a number of times since you wrote it while trying to get my stuff in order.
I’m on a long journey of learning (helped immensely by Monevator – thanks), but I do have one comment… Having been through McClung and then recently just done some planning using Otar’s tools, it is clear – if you accept back testing/aft-casting (Otar) as a basis for planning – that switching to UK versions has a more important implication which I don’t think you are explicit about in the intro. Performance will be predicted to be significantly worse than the US versions of portfolios.
That’s if you accept that UK vs US relative equity performance since 1900 is your key planning input. The difference is not small – in many of my scenarios it’s the difference between Good and Inadequate (in Otar parlance). Now, I’m not trying to say this is the only way to plan, but I’d suggest it does warrant mention. Your intro. mentions a few reasons why US investors favour their markets, but not this.
I’d suggest that while US investors are often now being advised to think more globally due to potentially lower future US market returns, this is even more true for the UK. A counterargument is currency exchange risk which you address in lots of other pieces on the site, but I don’t think explcitly in this intro.
I’m not sure that the purpose of switching the portfolios to UK markets is made clear. As I see it, there are three reasons why you may want to: 1) because you want to be in a “home” market, 2) because the original funds are not available and 3) because you wish to avoid currency exchange risk.
If 2) is the motivation (certainly more important than 1) for me ), then I’d argue that it’s possible to get quite close to many of the portfolios even if things like certain US equity classes may be more difficult to find as UK available funds.
@ Stuart – yes, agreed, this is a very dated article now and we’ve since written better pieces on portfolio construction that are more suitable for the UK market i.e. they’re global in outlook.
This piece shakes out the in-built US bias of the 9-lazy portfolios that then became a UK bias:
https://monevator.com/asset-allocation-types/
I don’t think an accumulating UK investor should replicate a US investors approach to domestic market allocation. The UK market is not diversified enough in comparison to the US.
You could make a stronger case for 10 – 20% in UK equity for a retiree who wants to avoid currency risk, as you imply.
Incidentally, there’s no reason to suppose the US market will continue to outperform the UK over the next 100 years. It’s not baked in. Even superior US economic performance won’t necessarily translate into superior market returns if US firms are overvalued.
Last time I looked, Sweden and South Africa had outperformed even the US over the kind of timescales you mention. I’m not recommending we all carve out massive allocations for Sweden and South Africa!
Thanks again for this and everything else you do on Monevator – I’ll have a look at the other articles.
Wonder if you came across Ben Felix portfolio and can think of UK version? https://www.optimizedportfolio.com/ben-felix-model-portfolio/