Slothful Investing: How to Beat the Markets With a Lazy Portfolio

by Louis Basenese, Advisory Panelist
Tuesday, July 21, 2009: Issue #1047

MarketWatch columnist Paul B. Farrell loves to tout the performance of his eight Lazy Portfolios.

They earn their name by being comprised of nothing but low-cost, passively managed index funds – properly diversified – that require nothing but an annual rebalance.

In his latest column, he gushes about how his lazy strategy “keeps beating the S&P 500, as well as popular actively managed funds.”

Here’s my rub: Mr. Farrell doesn’t have a corner on slothful investing.

We’re Going Fishing & Beating the Market, Too!

We’ve got our own version of a lazy portfolio at The Oxford Club. We call it the Gone Fishin’ Portfolio.

And guess what?

It’s outperforming the S&P 500, too. It has ever since we created it six years ago.

It’s trouncing the most popular actively managed funds. That includes the wildly popular Fidelity Magellan, Dodge & Cox Stock, Legg Mason Value, Janus Fund, Baron Growth and American Funds’ Washington Mutual.

It also outperforms all but one of Mr. Farrell’s (overly) self-promoted portfolios and it ties with his top performing one. But I’m not writing today to convince you to adopt our lazy portfolio over one of Mr. Farrell’s. The long-term numbers should always guide your decision there.

Understanding the Secret Behind Slothful Investing

It’s more important you understand the secret behind this type of lazy, slothful investing.

Every mutual fund manager dreams of beating the S&P 500 every year. Yet, less than 5% ever do. In fact, over any given period, you can count on 70% falling short.

Even the Joe DiMaggios of Wall Street eventually succumb to the averages.

Legg Mason’s Bill Miller serves as the most recent example. He beat the market 15 years in a row. Then he fell short… very short. In 2008, his Legg Mason Value Trust Fund (LMVFX) dropped 55%, about 18% more than the market.

• Thus, the first reason laziness works is because it keeps us from fighting a losing battle – trying to predict the handful of actively managed mutual funds that will outperform the market in any given year.
• The second reason laziness pays is because it forces us to use asset allocation – the only Nobel Prize winning investment strategy, responsible for 90% of any investment portfolio’s return.
• And the last reason is that it keeps a lid on our expenses.

Mutual Funds vs. The Gone Fishin’ Portfolio

The average actively managed mutual fund charges a 1.3% annual expense ratio. In comparison, the average expense ratio of the funds in our Gone Fishin’ Portfolio is about 0.30%.

At face value, a 1% difference seems minor. But, trust me. It can make a huge difference.

Just consider…

• Without fees, a $100,000 portfolio earning 10% a year grows to $11.7 million after 50 years.
• Add in a 1% fee and the ending value shrinks by $4.6 million.
• The kicker? Only $794,000 of that difference is actually fees. The rest comes from the lost gains associated with those fees compounding over time.

Obviously, we can’t invest for free. Lazy portfolios and slothful investing, though, get us pretty darn close.

Why Slothful Investing Is So Compelling

Add it all up – better performance, strict asset allocation, lower fees – and the argument in favor of slothful investing is pretty darn compelling.

So much so, institutional money managers are now giving slothful investing a try. A new survey by Greenwich Associates reveals that one in five institutional managers recently sold their actively managed mutual funds in favor of passively managed ones.

Of course, don’t expect Wall Street to recommend you make the same switch. Brokers can’t increase their wealth selling no-commission index funds without excessive management fees.

But that’s what we’re here for – to give you investment advice, devoid of conflicts of interest.

So if you’re frustrated with investing and coming up short, we encourage you to relax… and be lazy!

You’ll beat the market. Even better, you’ll have time for more important things in life like family, friends and fishing.

Good investing,

Louis Basenese

P.S. You’ll recall our Alexander Green penned a best-selling book on our lazy approach called The Gone Fishin’ Portfolio: Get Wise, Get Wealthy… and Get on With Your Life. I’m happy to report his latest book, The Secret of Shelter Island, is achieving similar notoriety. If you haven’t read either, I encourage you to do so.

You can buy both at a reduced price at Amazon.com here and here. Or, you can get a copy of The Gone Fishing Portfolio with your new subscription to The Oxford Club.

• Another Reason to Avoid Mutual Funds
• The Gone Fishin’ Portfolio: The Best Low-Cost, Tax-Efficient Investment System
• Tax-Managing Your Investment Portfolio: There’s Still Time to Cut Your Taxes

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5 Responses to “Slothful Investing: How to Be Lazy… and Still Beat the Market”

1. Steve Says:
   July 22nd, 2009 at 12:34 pm

   Does the Gone Fishing Portfolio include ETF’s? Does it generate income?

   Thanks

   Reply

   

   john vanderbunt Reply:
   July 26th, 2009 at 9:36 am

   I am interested in the answer to this

   Reply

   

   marvin eisenberg Reply:
   July 27th, 2009 at 3:17 pm

   I understand the “gone fishin’ portfolio concept. Is any modification needed to produce the cash necessary for the required distribution from an IRA?

   Reply

   

   marvin eisenberg Reply:
   July 27th, 2009 at 3:19 pm

   what does your term ” awaiting moderation” mean as an answer to my question?

   Reply

2. roy Says:
   July 22nd, 2009 at 5:44 pm

   Are there any funds out there that balance for you?

   Thank you,

   Roy

   Reply

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