Lazy Portfolios Beat the S&P – but Claims are Bogus and Deceiving

by Darwin on July 7, 2009

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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1 Mark Wolfinger July 8, 2009 at 12:16 am

I would never adopt a lazy portfolio that outperformed over a specified period of time.

I’d prefer to own SPX, Russell 3000, or even the Wiltshire 5000. But only when those portfolios are insured against significant losses by using collars.


2 Jim July 22, 2009 at 12:20 pm

You talk about “historical cherry picking”. That sounds to me as if someone sat down recently and looked back at market performance in the past and picked out the blend of investments that would do well. As in somoene manufactured all these lazy portfolios recently and did it in an artificially way by specifically throwing in some emerging markets to prop up the performance.

But at least some of these portfolios have been around for years. Aronson, Margaritaville and Yale have all been around 3+ years.

3 Darwin July 22, 2009 at 1:27 pm

the historical cherry picking is referring to highlighting the portfolios that did well. If there are tens or hundreds of different lazy portfolios and one goes back to pick the best ones due to their holdings, that’s cherry picking. I don’t argue that the portfolios were established a while back but rather that the ones highlighted are the ones that did well if you look back from today. I didn’t see the other tons of portfolios highlighted nor did I see any that did well that weren’t heavy in the “hot sectors”. So next year if us equities lead the way, will there be a new article touting a new set of great

Regarding the three year back period, emerging markets were already outperforming for some time already.

4 Jim July 22, 2009 at 5:07 pm

They’ve been reporting on the same portfolios at least since 2006:

5 Jim July 22, 2009 at 5:15 pm

Actually he’s been tracking a few of them since 2004.
And then he’s added more over the years.

6 Darwin July 26, 2009 at 9:42 pm

So, in the 2004 article you referenced, there are three portfolios. The first one is “Couch Potato” which is conveniently omitted from the subsequent articles. Could this be because of its 75% weighting in the S&P500 which wouldn’t look very good? The other two only beat the S&P primarily because they “didn’t lose as much” during the past several years due to a 40% bond holding. It’s like my “cash in the mattress example” or just buying CDs and saying I discovered this great portfolio. Given, CDs outperformed the S&P of late. But, are CDs the best long term investment over 30 years? Certainly not.

In the 2006 article you reference, there are 5 portfolios which have returns less than those of CDs as well…primarily weighted in either bonds or emerging markets, which outperformed the S&P by a wide margin over the past several years.

So, if you think emerging markets and bonds are going to continue to outperform, you could easily set up your own; heck, why even hold any of the S&P500 if the other holdings outperform the S&P500, right? Chasing last year’s returns can be dangerous. Retail investors are usually late to the game after the institutional money has been made.

I’m sorry, but if you look at EVERY ONE of the lazy portfolios, they all lost money over the prior 1 and 3 year period and you could have bought into a higher yielding CD than the 5 year performance of ANY one of them. I just don’t think this performance is worth a front page article on MarketWatch each quarter when Farrell comes out to write an article since a high proportion of his posts seem to be on this same topic.

7 Jon August 9, 2009 at 3:44 pm

With all due respect, your argument against the lazy portfolios is what seems to me like cherry picking: It seems as if you are seeing what you want to see and neglecting the sound thought and strategy that has gone into these portfolios. Your example of buying CDs is just silly: The point of these portfolios is that they allow reasonable gains that track well with the markets while providing broad diversification; a CD will never provide, say, a 20 percent annual return in a year that markets skyrocket. I don’t know your site well, so I’m not sure what your bias is, but whatever it is, it’s showing.

8 Darwin August 9, 2009 at 4:36 pm

Perhaps you didn’t pick up on the sarcasm and irony of my CD example and “mattress portfolio” above. As I mentioned in prior comments and the article:
– I am not against index funds – they’re great.
– I am not against passive long term investing over higher fee/higher tax liability actively managed trading/funds
– I am not against the “concept” of employing a similar strategy and revisiting/rebalancing as appropriate.

What I am against is historical cherry-picking and touting “index-whippers” when a mainstream site continues to go back and pick a few funds that happened to hold hot sectors such as emerging markets and bonds that happened to beat the S&P recently and then say, “these portfolios whip the S&P”. There’s no reason to believe that will occur in the future and I don’t think touting 2-3% returns over 5 year periods should be viewed as a resounding success. Save the cover story for an investment that actually outpaced inflation at least!

9 Jon August 16, 2009 at 12:29 am

I don’t believe you were using irony when you mentioned CDs in the last paragraph of your previous post. Your point was that a gain of a few percent over a period of 5 years isn’t much, and you point out that CDs purchased at the beginning of that period would have done better. First, that’s cherry picking: Obviously, nobody interested in aggressive long-term gains is going to put all their money in CDs. Second, in a normal five year period, I’d agree that 3 percent isn’t compelling. No five-year period that includes the last couple of years can be viewed as normal, though, and many people out there who lost a large percentage of their savings over the past few years would feel fortunate to be up 1 to 3 percent per year.

As someone else pointed out earlier in this thread, these portfolios have been written about on Marketwatch for a long time. Honestly, your criticisms their coverage seems more guilty of cherry picking to me than their coverage. What’s the big deal anyway? If you want to provide a valuable perspective to your readers, why not just give a fair, thoughtful, historically accurate summary of how a range of lazy portfolios have performed, and judge them on their merits–not on the merits of Marketwatch’s coverage of them.

One final comment: You say there is no reason to believe that these portfolios will beat the S&P in the future. Really? You don’t think that, in the long run, a well-diversified collection of low-cost indexed funds is likely to beat the S&P? If that’s not, what’s the value of diversification?

10 Darwin August 16, 2009 at 2:10 pm

1. The CD example and the mattress example for that matter illustrate the hazards of cherry-picking – which is what these gushing articles on MarketWatch do about quarterly. hmmm. how about the last quarter? Many of these portfolios hold TIPS funds which were completely trounced by the S&P500. So, if you want to cherry-pick, you can tell pretty much any story you want.

2.”As someone else pointed out earlier in this thread, these portfolios have been written about on Marketwatch for a long time.”

– As I already demonstrated, MW has not been consistent in which portfolios they highlight each time. They cherry-pick.

3. “You say there is no reason to believe that these portfolios will beat the S&P in the future. Really? You don’t think that, in the long run, a well-diversified collection of low-cost indexed funds is likely to beat the S&P? If that’s not, what’s the value of diversification?”

– These lazy portfolios, while perhaps good for some investors, are certainly not the panacea for all investors which many articles and bloggers (included on this chain) would lead you to believe. They do not take into account time horizon or risk aversion. Nor do they take into account other factors like what other diversification/asset classes are held outside your investment account (i.e. are you already getting diversification elsewhere because you are anticipating a pension, you have investment real estate and you own a small business on the side with residual income, etc.). Therefore, they are NOT a one stop shop for all investors and the premise that anyone can simply dump their retirement account into this makeup is naive and misleading.

Perhaps as a young investor with low aversion to risk and a 35 year time horizon, I’d be best off in just a 75% Emerging Markets ETF and 25% S&P500 instead of dilly-dallying with TIPS and government securities over a 35 year period. Perhaps someone approaching retirement the last year or two never should have touched one of these portfolios because they were led to believe they were so “safe”, “diversified” and “market-whipping” that it tempted them out of CDs (which were yielding 4.5%+) and they ended up losing money to inflation. Do you think that’s right?

The point is that there are no guarantees that these lazy portfolios will be a suitable investment for everyone. And the gushing reviews by the media and bloggers alike would make it appear so. Again, I just can’t get excited over something that lost money to inflation, but happened to beat the S&P500 during the most precipitous downturn in generations. Moving forward, no guarantees.

11 Jon August 17, 2009 at 12:49 am

True, true, these lazy portfolios aren’t for everybody. To refer back to one example you gave, I certainly wouldn’t recommend that anybody close to retirement put a large chunk of their money in a lazy portfolio, but that’s because I hold that they shouldn’t have a large chunk of their money in equities.

I also agree that lazy portfolios aren’t a panacea. Neither are managed funds or financial managers or financial advisors or newsletters. Investing in equities is risky — especially for people who do not have the time, interest, knowledge, and/or means to rigorously and frequently research the companies they invest in, which I’d guess accounts for about 99 percent of small investors.

For these investors, I’m very comfortable in my belief that if they want to participate in the considerable gains that equities can generate while also mitigating risk somewhat, a well diversified collection of indexed funds is a great solution. Say what you will, they have stood the test of time so far, and I believe they will continue to do so. And people can save the money they might otherwise spend on financial advisors, mutual fund fees, newsletters, etc.

I have to ask: How did your newsletter perform over the past two years and over the past five? I genuinely don’t know the answer. Did you beat the S&P? Did you do better than 3 percent? If so, congratulations.

12 Jon August 17, 2009 at 12:56 am

Ha. Funny. I just noticed the anxious little frowny-faced graphic that appears with my posts. I certainly didn’t choose it. Is that the default graphic your site assigns to people who bother to post?

13 Darwin August 17, 2009 at 7:58 am

I don’t have a newsletter, so I’m not sure what you’re referring to. I derive no financial benefit from some sort of “bait and switch” from lazy portfolios or whatever you may think my motive is. I had just read the MW article for like the 4th time in a year and decided to investigate it further and write a post about it. That simple.
On the Avatar,
It’s some random Avatar program that I chose since it was a little different than the default blue screen for everyone that didn’t already have an image. If you look elsewhere on the blog, you’ll see various faces.

“Bother to post?” – I “bothered to reply” to several comments and concerns on this chain, including yours, so how ’bout a little respect? It’s OK to have a difference of opinion. This is what makes web 2.0 so great!

I hope you’ll check out some other content on the site and I’m sure you’ll find some stuff that you enjoy.

14 Jon August 21, 2009 at 5:43 pm

I apologize if you feel I haven’t shown you respect. I do disagree with you, I believe you’re giving short shrift to a concept that’s actually a great thing for most small investors, and I believe you have a bias, as most of us do, but I think I’ve stated these beliefs respectfully. You’re not the one who ended up with an insulting graphic icon in this exchange.

I don’t think you’re up to any sort of evil deed with lazy portfolios. In fact, I doubt you’ve thought about them much one way or the other. You do seem to be part of the Wall St. culture, though, right? I doubt the Wall St. graphic assigned to your posts was randomly chosen. And you seem to view and run your site as a business. That’s great. There’s nothing wrong with that. But you do seem, in essence, to be selling your financial and investments insights and advice. You generate content here, people like me read what you’ve written, and the traffic helps you sell ads.

15 Paul August 25, 2009 at 12:55 pm


I do not think there are thousands of Lazy Portfolio’s to cherry pick from.

At first, I scoffed at the idea of comparing the Lazy Porfolio’s to the S&P 500. Why the S&P 500? This makes no sense, and the S&P 500 will most likely always lose out to a well diversified portfolio. As I started to read more into this subject, the key point is this: you can get S&P 500 like returns from a well diversifed 60% stock and 40% bond mix. You can get the S&P 500 like returns with less volatility. That is the key point. (However, I think one can argue going forward, the REIT markets and US Treasury markets are not going to provide anywhere near their historical returns.)

16 Robbie Bainer December 28, 2009 at 5:21 pm

These days, there is danger is mindless buy and hold strategies, but I think the lazy portfolios offer investors a place to get started. They encourage diversification, which is essential, and, especially if implemented with comparable ETFs, allow trading in and out and stop losses to keep you in the game even during sudden market upheavals. So, not the final word on investing, but a place for the person who cannot or will not want to spend more time studying individual stocks or bet the farm again on a broker who loses more for them than they can themselves. The key issue here is setting up some stop losses for really bad drops, which is possible with ETFs in the mix.

17 Chrisfs March 15, 2010 at 1:23 pm

A different problem Paul Farrell has is that of general credibility.
When he’s not pushing his lazy portfolios he’s making doomsday predictions of the stock market and all of Society in general.
For example, despite the title of this post
There is no investment advice , it’s simply fearful statement on how unless you are among the richest, you are doomed to 3rd World style anarchy.
An actual quote “Are you prepared? Or preparing? Will your family survive in a post-apocalyptic world, when anarchy is rampant in America?”
He quote someone as saying”Make tons of money. Buy an isolated farm in the mountains. Protect family against the barbarians: “Your safe haven must be self-sufficient and capable of growing some kind of food … It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson.” ” and then asks people to “Imagine a scene like Port-au-Prince after the quake”

So I’m supposed to take this guy’s stock picks ???? There is a flood of info on the Internet, one must pick and choose or spend 24 hrs/day reading advice. His column is one I will happily skip. I don’t know why Marketwatch even keeps him around. Actually I do know, alarmist columns drive traffic to the station. Some people love being alarmed. But it doesn’t make for good investment advice or even serious discussions.

This is a guy that’s interested in creating hype, not giving fact based advice.

Darwin Reply:

yeah, I’ve read Marketwatch for a while. Sometimes the articles are good, sometimes useless banter with catchy titles that invite a click.

H Reply:

Should we compare these portfolios’ Treynor or Sharpe Ratios?

18 Rick March 18, 2010 at 12:16 pm


I think you may be missing a critical element of most these “Lazy Portfolio’s”… they are adjusted on a yearly/annual basis – please look at the following link…

19 H May 9, 2012 at 3:53 pm

Yes, the key thing is these portfolios have been around for ~ten years.
What is their Sharpe Ratio?

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