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Weekend reading: Return and volatility data for the US lazy portfolios

Weekend reading

Good reads from around the Web.

After we updated the lazy portfolios for UK investors the other day, some readers asked good questions about how the different strategies had done in terms of returns and risk over the years.

I say good questions partly because I don’t have good answers!

But I do know the different allocation strategies all did fairly well – and fairly similarly – over the years1. That’s one reason I suggest people don’t sweat their micro-asset allocation.

The other reason is that even if some particular strategy does deliver higher gains – and some will, due to how small differences in compound annual returns can make a big difference over 30-40 years – I don’t believe you can reliably predict which one in advance.

Remember these are long-term plans that you’ll rebalance for decades. If you think you can run the numbers and come up with anything other than broad guesses as to whether, say, equities in the UK will do better than those in continental Europe, then I believe Steve Hawking has some work he needs help on with super-string theory.

Don’t worry, be lazy

If you do want to have a try – or you want reassurance that it probably doesn’t matter – then Mebane Faber has come out with comprehensive data for the US versions of the lazy portfolios.

Here’s a table showing his findings – see the full post for precise details of the allocations:

Returns from US passive portfolios (Click to enlarge)

Returns from lazy US passive portfolios (click to enlarge)

Faber notes that:

People spend countless hours refining their beta allocation, but for buy and hold, these allocations were all within 200 basis points of each other!

…over the long term, Sharpe Ratios cluster around 0.2 for asset classes, and 0.4 – 0.6 for asset allocations.  You need to be tactical or active to get above that.

I’m sure the same is true of UK equities, though I’d love to have hard data to share with you some day to show it.

The law of diminishing returns

Once you’ve got a basic passive portfolio strategy in place, you’re better off focusing on keeping costs low, reducing your losses to taxes – and maybe trying to earn more money!

It’s either that or follow me down the dark path of running some of your money actively. You might beat the market if you try, but it will prove a seriously bad move for most.

So why risk it?

The lazy portfolios will deliver for as long as the markets do. Some will turn out to be better bets than others thanks to the way compound interest works, but it’s impossible to be sure which ones in advance.

They really do make investing simple, and it’s almost a crime that as a reader of this blog you’re among the relatively few who even know they exist in the UK.

Pick one you fancy, and get on with your life.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

  • Equity valuation by country [Graphic]Picassa (via Horan)
  • 12 things I’ve learned about investing from George Soros – 25iq
  • Richard Beddard has stumbled upon wonderful Goodwin – iii blog
  • The US economic recovery is real – ValuePlays
  • How do you respond to ‘the grind’? – Abnormal Returns

Other articles

Product of the week: HSBC will become the first lender to offer a fixed-rate mortgage below 1.5%, according to The Telegraph. It says it will charge 1.49%, fixed for two years. There’s a £1,999 fee.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.2

Passive investing

Active investing

Other stuff worth reading

  • Is 3% the new 4%? – Morningstar
  • How to invest in Kevin ‘off the telly’ McCloud’s biz [Search result]FT
  • RDR: The revolution that wasn’t [Search result]FT
  • Bernstein on ‘deep risk’ versus ‘shallow risk’ – Wall Street Journal
  • Is the prime London property market overheating? – Telegraph
  • Forget ‘peak oil’, it could be ‘peak demand’ that’s near – The Economist

Book of the week: Private investor and Monkey With a Pin author Pete Comley has written a new book. Entitled Inflation Tax, it’s all about how governments will try to inflate away our debts. I’m also pleased to say Pete is writing another guest post for Monevator – watch this space!

Like these links? Subscribe to get them every week!

  1. Sequence of returns risk notwithstanding []
  2. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []
{ 3 comments… add one }
  • 1 Never land August 3, 2013, 1:50 pm

    I agree with you about precise portfolio allocation, but I think it’s worth looking every few months to see if there are better value (which usually means lower cost) platform/brokers out there

    Costs are almost the only thing in your control

    I just moved my annual expense ratio from about 0.3% to 0.2%

    My happiness knew no bounds

  • 2 Noodle - just starting August 12, 2013, 9:27 pm

    Hi, Have been reading all your posts and they are a great help with so much info out there so really big thanks for the time you and the other guys put in. Asking question on this post as it seems as good a one as any!?

    Simple really, im late 20’s about to start up my investment savings, already have cash ISA that I try to max out each year. Thinking of going vanguard lifestyle – just for the ease and simplicity – I guess vanguard 80% or 60% or combination. I don’t really have a lump sum so looking to drip feed into fund with maybe £500 upfront and maybe £100 monthly DD. Questions:

    1- Am I best to go stocks/shares ISA normal or SIPP? – Don’t really understand SIPPS! (can I with Vanguard with these?) – Taking into account i’ll prob only ever pay in very max of a couple of grand a year.

    2-Have setup cash ISA this year with HSBC already so can I still setup a separate stocks ISA elsewhere?

    3- Have tried to work out cheapest option with your updated comparison but failed! Choice between HL, Alliance Trust, Best Invest, III. Or just keep with HSBC who I have my ISA with currently? With my approach which do you believe to be cheapest – drip feeding monthly?

    4- I also want to occasionally buy shares of individual companies – Is it cost prohibitive through these companies – assuming ill only ever want to buy say £50/£100 worth shares at a time- Is it worth it?

    Sorry for the long post but any quick fire answers/advice would be greatly appreciated!!

  • 3 Sencha November 13, 2013, 7:21 pm

    I’m an active investor like you but have taken a little time to put together a (US) lazy portfolio site for friends. If you have the interest, I have a comparison matrix of the return vs. risk for some of these same portfolios over 20 years.


    I get what Faber is saying about the CAGRs being so similar (maybe a spread of 2%) but an extra 1-2% can of course mean a lot when you look at it from a different angle. 8% takes 9 years to double your money. 10% takes only 7.

    Nice blog.

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