Marketwatch continues to post on Paul Farrell’s “Lazy Portfolios” that purport to “whip” the S&P500. While the premise of diversification and passive long term retirement investing is a good one, the claims of whippage are a bit overdone in my opinion and may lull naive investors into complacency when they should be scrutinizing their investments and advice more thoroughly to consider long term secular market trends, rebalancing, and their current financial situation. While selectively parsing out time periods and portfolios to highlight in the barrage of articles (a front page section on Lazy Portfolios with multiple links today), to the casual reader, this lazy business may seem like the coup de etat for setting a long term retirement investment portfolio that is sure to make you rich. The problem here is that the benefit of historical cherry-picking ofo data to present lends itself to disingenuous and misleading claims and false hope for retail investors – especially the ones who just lost 50% of their portfolios to the recent market crash.
Here is the advertised list of wonderful lazy portfolios that will ensure financial freedom in your lifetime:
Why are the Lazy Portfolio Claims Deceiving?
Well, it’s not difficult to look back and cherry-pick portfolios that prescribed a healthy portion of the hottest sectors during a given historical time period – Emerging Markets, and Treasuries (at least in comparison to the abysmal S&P500). Take the top one on the list for instance – the Aronson Family Taxable Lazy Portfolio:
Take a look at the S&P500 returns which are supposed to be the benchmark, versus the other asset classes and sectors listed in the portfolio.
By diversifying into virtually ANY other asset class, you “beat” the S&P500 be default.
So, I have this great lazy portfolio I developed – it’s called the “Mattress Portfolio”. If I did a 50/50 split between the S&P500 index and cash-under-the-mattress portfolio, I “beat” the index over any recent time period. This is the epitome of historical cherry-picking. Is the goal here to “not lose as much” and claim victory?
What if, as a skeptic, I decided to use a different time period and look at the performance of some of the same “hot” sectors that drove the “outperformance” of the Lazy Portfolio? The same outperformance by emerging markets was trounced during 2008. In looking at the chart above, you’ll note that during the prior 1 year period, TIPS and long-term Treasuries drove the “whipping” and over the prior 5 year period, the 14% annualized return of emerging markets completely drove the performance. It’s convenient that these outperformers were given the higher 10% and 15% ratings.
How did the “Hot” Sector do in 2008? Not so Hot.
Let’s Look at how a “hot” investment did in 2008. The same Emerging Markets sector that virtually drove all the gains in the aforementioned lazy portfolio was totally trounced. The S&P500 lost 38% while the Emerging Markets fund above lost 55%. As I cited in this list of 2008 stock market returns by country, the US actually outperformed pretty much every country in the world – even though we created the housing bubble and it burst here first. So, if I wanted to look at this portfolio in 2008, different story. Now, in 2009, Emerging Markets are hot again (see this full Emerging Market ETF List revealing some 100%+ gainers for 2009).
What they’re boasting is that while the lazy portfolios all actually lost you money over the prior 1 yr and 3 yr periods, well, they didn’t lose you as much money as the S&P500 did. This isn’t news. It’s not an investing gem. It’s just random historical cherry picking. If you look through each of the purported market-beaters, you’ll notice a little emerging markets fund sprinkled in there.
That would be like me going back to the late 1990s and sprinkling in a little Internet/Tech fund and saying “by using this lazy portfolio, I beat the market every year”.
Nobody knows what the next hot secular trend will be. Believe it or not, there are vast periods of time where Emerging Markets have underperformed and given the variance from the mean, perhaps we’ll see that again over the next decade and these winning lazy portfolios won’t look so brilliant next time.
But that’s OK, because there will be another list of 10 lazy portfolios that did happen to have the hot sectors, and MarketWatch can then hold those funds up as brilliant picks for the next generation of investors.
Statistically speaking, if there are hundreds of “Lazy Portfolios” out there, surely some of them are going to look incredible historically if the diversification and weightings are just right. What does that portend for future performance? Absolutely nothing. It was statistical chicanery. Now, don’t get me wrong – diversification is good. These low-fee funds and ETFs are good – I like them better than the vast majority of actively managed mutual funds that are just skimming money for underperformance and increased tax liabilities.
I actually like some of the portfolios and would consider constructing one myself if I were starting from scratch. I just don’t believe that over an extended period of time, any one of these is sure to beat any of the other ones – or even the S&P500 itself.
Diversification is critical since it limits volatility, correlation and can provide returns as good or better than the benchmark. But, let’s just be realistic about the stellar performance claimed and future potential for each of these. Throwing darts at a spinning wheel to pick your weightings for the very same investment vehicles to construct a “random lazy portfolio” may very well beat the Aronson Family Trust cited above.
What are your thoughts? Would you blindly prescribe to any one of these “historically superior” performers for your long term investment plan?
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