Tag: Dr. William Bernstein

  • No Brainer Portfolio – Lazy Portfolio

    No Brainer Portfolio – Lazy Portfolio

    No Brainer Portfolio - Lazy Portfolio
    The main feature of this portfolio is the idea that most return is determined by the asset allocation of the portfolio, more than by asset selection.

    No Brainer portfolio is one of the “Lazy portfolios”. No Brainer portfolio cover investments proportionately in four asset classes – US bonds, total US stock market, small-cap US stocks, and international stocks. It is very useful for investors with long-term goals. The point is that investors can favor one of the asset classes at different times. By doing so investors could gain nice risk-adjusted returns. 

    Designed for investors with a long time horizon that will favor each of the classes at various times, the portfolio aims to provide diversified risk-adjusted returns. This motif seeks to replicate Dr. Bernstein’s model by identifying ETFs that would be contained within the “No Brainer” asset class structure.

    Dr. William Bernstein believes that asset allocation is more valuable for investors than choosing individual stocks or bonds.

    This is the simplest portfolio Dr. Bernstein explains in his famous book “The Intelligent Asset Allocator”.  Well, this book is generally suggested not only for the No Brainer portfolio. You can find a lot of extremely valuable info on the diversification and portfolio construction in this book. It is highly recommended among investors. 

    In this book, Dr. William Bernstein explores historical performance to come at an almost simple to implement a portfolio. He believes this portfolio should perform well in the long-term. No Brainer portfolio consists of four asset classes in the following proportion:

    25% Short-term Bonds
    25% of International Stocks
    25% Small-Cap Stocks
    25% Large-Cap Stocks

    All you need is a simple, well-diversified portfolio 

    The Bernstein no-brainer tracks very strictly the “simple is better” rule.  This lazy portfolio could be very suitable for any investor who dislikes monitoring the investments every day and has a longer time horizon. 

    Here are some stats about the total return by using the No Brainer portfolio.

    Over the past 10 years, the No Brainer portfolio has had an annual return of about 5%. Not good enough? In fact, it is in line with the S&P 500. This portfolio is a wonderful choice for anyone who doesn’t like high-risk, not-assured returns.

    Why the No Brainer portfolio is so special?

    Diversification! Yes, Dr. William Bernstein’s No Brainer portfolio is focused on diversification through many asset classes. It covers almost all assets. There is some interesting thing about William Bernstein, according to his own words he is asset class junkie but not only because of this particular portfolio. Dr. Bernstein is the creator of many portfolios.

    So, you can imagine how broadly his portfolios display diversification. It is a 360-degree portfolio.

    Among others, he created Four Pillars, Cowards Portfolio, Sheltered Sam Portfolio, etc.

    For example, his  Cowards Portfolio consists off:                

    10.00%  US Large Cap Value
    15.00%  US Large Cap
    10.00%  US Small Cap Value
    5.00%    US Small Cap
    5.00%    REITs
    5.00%    Emerging Markets
    5.00%    Pacific Stocks
    5.00%    European Stocks
    40.00%  Short Term Treasuries

    What are the advantages?

    By applying this kind of portfolio, so-called lazy portfolios, you could minimize taxes by asset location or by adding a specific asset class such as municipal bonds. You could build such a portfolio based on your age and appetite for risk. Also, you can add employees’ stocks.

    All this shows the no brainer portfolio as a very helpful model for all of your investments.

    The most important, Bernstein’s no brainer portfolio will never face you with the cruel reality. Contrary, it will save you from that since from the very beginning you will know what you can expect in the returns.

    Why use the no brainer portfolio?

    Investing is hard but by applying some of the lazy portfolios it doesn’t have to be, investing could be easier. How is that? Let’s see!

    Here, in the no brainer portfolio, you have ONLY 4 asset classes. That provides you to have a quick overview of your investments. It is simple. Why would you like complexity? It may cost a lot of money and time to watch.

    Moreover, this portfolio doesn’t contain any special asset classes. So they are simple to understand. Just 4 asset classes! That’s so easy!

    Who is the creator of the No Brainer portfolio?

    William Bernstein was born in Philadelphia and educated in California where he earned a Ph.D. in chemistry at Berkeley. Did you know that he did it in just three years? To got the opportunity to work more closely with people, he went back to school and earned M.D. from UC–San Francisco. At that time he was the only neurologist in Coos County. 

    From 1980 to 1990, Dr. Bernstein treated migraines, Alzheimer’s and Parkinson’s. Ten years living all of these, he was under enormous stress and was forced to cut his working hours. Also, he wanted to pay more attention to his hobby – finances and investing. And Bernstein decided to learn more about it.

    The first thing he required was data. Several years later he started to write a book with an interesting premise: people are wrongly trading individual assets instead to buy entire markets. 

    The book was published on his website Efficient Frontier in 1996.

    and in 2001, McGraw-Hill published “The Intelligent Asset Allocator”. His “The Four Pillars of Investing” was published in 2002.

    How to create a lazy portfolio 

    First, keep the cost as low as you can. Define your tolerance for risk and how big returns you want. Find data for historical returns to build a portfolio of index funds. They have to hold a mixture of assets that are able to produce a balance between risk and return. Investigate among different classes value stocks, small-caps, bonds, REITs, micro-caps, everything. You may think you will need a powerful software for this. Actually, a bit of common sense is all that you need. For example, pick 60% stock and 40% bonds. That will work well for investors. The other solution is to choose some low-cost fund that includes stocks and bonds both. 

    Sounds simple, right?

    Bottom line

    According to Bernstein, all you need are several skills to be a successful investor. One is understanding the financial implications of numbers since math is what lies behind investing. Also, as an investor, you must have the ability to trade without emotions. In other words: sell when the stock prices are growing, and buy when they are falling. And be independent. You have to have your opinion. Don’t believe in everything that pricey advisers say. Have trust in your basket of assets.

    The lazy portfolios offer higher returns. This kind of portfolio has withstood the test of time and will be valuable for many years. And, as final words, don’t let be overwhelmed by too much information. Sometimes, you will make better choices with less info.

  • Lazy Portfolio – How to Make Wealth With Minimum Engagement

    Lazy Portfolio – How to Make Wealth With Minimum Engagement

    Lazy Portfolio - How to Make Wealth With Minimum Engagement
    A lazy portfolio is a diversified portfolio that allows you to grow your wealth without stress or a lot of work.
    There is no active trading, no monitoring your stocks every day, and no paying to handle your money.

    Let’s make clear what’s a lazy portfolio? In short, the lazy portfolio is passively managed, low-cost, diversified and tracks an index.

    Actually, a lazy portfolio is a simple set-it-&-forget-it strategy. It requires a minimum of maintenance so we can easily say it is a passive investing strategy. Due to its nature, it is suitable for long-term investors. In essence, it is a buy&hold strategy that working very well for investors that feel fears when they have to make investing decisions. Even more, this strategy provides investors to avoid greed, maybe the most dangerous feeling in the stock market. 

    The lazy portfolio isn’t only for lazy investors, this has to be clear. It is for investors who want to avoid high risks while investing. We will introduce some of the best lazy portfolios that could provide above-average returns with below-average risks.

    How to recognize the best lazy portfolio?

    Actually, it is yours, the one that you maintenance. Each investor has its own style of managing, a different approach, so the way of investing is absolutely individual. But the goal is the same – to outperform the market and generate the highest-as-possible returns.

    In most cases, a lazy portfolio can do that. Even Warren Buffett believes in a lazy portfolio, you can ask him. Also, many other successful investors built a lazy portfolio instead of fancy strategies. 

    But in most cases, a lazy portfolio will not give you to time the market, or to beat it. Also, it will never give you a chance to pick individual stocks but, at the same time, it is low-cost and loaded with fewer fees.

    A selection that makes money

    Index funds are a good choice as being less volatile. Well, you will not earn your money fast but you could stay in the market for a long time, over 10 years, for example. And you’ll make a profit.

    Index investing is essential for laziness. Trust us. You don’t need to actively manage ETFs. What you have to do is to choose among several different recipes but generally, they come into three categories:

    Two-fund portfolios
    Three-fund portfolios
    Four-fund portfolios

    Two-fund portfolio

    A two-fund portfolio is suitable for investors who want an easy asset allocation portfolio. The two-fund portfolio is built of one fixed-income fund and one equity index fund. You will find your selections depending on the asset class and asset type.

    It easy to create a two-fund portfolio. 

    There are almost 2,000 ETFs out there and you can pick any of them. 

    First, decide which assets you need. Stocks and bonds are of the core asset classes and your lazy two-fund portfolio will need them. Stocks perform well when the economy is good. But, bonds will protect your portfolio from market uncertainty. Of course, you don’t need to hold stocks and bonds, you can choose something else, as we said.

    If you are a very lazy investor your two-fund portfolio could be consists of 60% of total world stock index fund or ETF and 40% of US diversified bond index fund or ETF, for example.

    Three-fund portfolio

    A three-fund portfolio is composed of only three assets. They are usually low-cost index funds. It requires very little maintenance on your part and that’s why it is another example of a lazy portfolio.

    It is a pure 60/40 rule. This one recommends investing in international index funds and stock market index funds. For example, according to Taylor Larimore, an advocate of holding investing simple, all you need is to handle with three mutual funds. That will require an hour per year managing your money, he said. You may diversify your three-fund portfolio on 40% of bonds, 42% of stocks and 18% global stocks. According to some experts, it is the best proportion.

    Four-fund portfolio

    The best example of this kind of lazy portfolios maybe is Dr. Bernstein’s “No-Brainer” lazy portfolio.

    Dr. William Bernstein wrote “The Intelligent Asset Allocator” and “The Birth of Plenty”. He has promoted the capability of the index fund over individual stocks and bonds. 

    One portfolio that he proposed in “The Intelligent Asset Allocator” is named the “No-Brainer” portfolio. It is composed of 4 equal funds: 25% bonds, 25% global stocks, 25% US stocks and 25% small-cap US stocks. No-brainer indeed. 

    But this portfolio will give you a chance to diversify the risk over time.

    If you are smart, you can be lazy

    You will show you are a really clever investor if you set up all of your buying to be automatic. For that, you will need SIP – a systematic investment plan. Mutual fund or brokerage could help you with this. In this way, you will lessen the risks of market fluctuations. Moreover, this will provide you invest a fixed sum in a mutual fund plan at regular periods. For example, you can invest $500 in a mutual fund each month. It is a helpful tool.

    Manage no-load funds

    As we said, a no-brainer is really good. If you use no-load funds for your lazy portfolio you will avoid sales charges, so-called loads. Well, to make this clear. You are dealing with mutual funds and it is quite possible to do all the necessary things related to your portfolio and investments, yourself. So, why should you pay any additional fees? The point is to keep your cost low to boost your returns, right?

    Rebalance your lazy portfolio

    Re-balancing a lazy portfolio is simply turning the current investment allocations back to the initial investment allocations. So, you will need to buy or sell shares to bring back the allocation percentages into the initial balance. 

    Re-balancing is important maintenance and you should do it periodically, for example, once per year. Well, there is always a possibility with, for example with mutual funds, to set up automatic rebalancing.

    Advantages of a lazy portfolio

    Lazy investing could be the best way to invest. First of all, it is simple Holding just a few funds makes things easier. Further, it is low-cost investing since you don’t need to pay any fees for trading, managers, etc. If you build a lazy portfolio you just have to buy some cheap assets and voila. But the most important feature is the diversification. You can hold thousands of stocks and bonds with just several investments. 

    Disadvantages of a lazy portfolio

    It isn’t easy to find some disadvantages, but there are some things to consider before starting.

    One of them is tax-loss harvesting. if investing with 2 or 3 funds, you might miss out on some tax-loss harvesting possibilities. The other problem is the lack of customization. You can’t customize a lazy portfolio like you can with others. But that is the point, to keep it simple. Simplicity is the amazing part of it.