Influenced by Jack Bogle, many passive-index investors opt for simplicity – buy, hold and rebalance with an an elementary allocation to broad equity and safe bond markets. Fans of the Harry Browne approach advocate equal holdings of three asset classes, each of which behaves differently (and provides diverging benefits) in various market conditions. Somewhere in between, however, is a range of options that take the best from both worlds – of course, it is up to the individual investor to decide if such hybridizations are suitable to their investment strategies.
A typical ‘Lazy Portfolio‘ (implemented with low-cost passive Vanguard funds, for instance) of a Jack-inspired ‘Boglehead’ goes something like this:
- 1/3 Total US Stock Market Index
- 1/3 Total International Stock Market Index
- 1/3 Total Bond Market Index [or: 1/3 Intermediate-Term Treasuries Fund]
The traditional Permanent Portfolio likewise consists of a series of even splits, but adds two critically different assets (arguably: two entirely other superasset classes):
- 25% Cash (Ideally: Treasury Money Market Fund)
- 25% Gold (Physical, optional: ETF for Rebalancing)
- 25% LTTs (Long-Term Treasuries)
- 25% Stocks (Broad Market, US or Global Index)
Some theorists and fans on either side will argue for the merits of one over the other, but each general strategy has worked quite well over the past decades for any who rigorously employed it. The first has provided growth through income-generating assets, while the latter has also grown but with fewer years of negative performance thanks to the addition of more low-correlating classes (and despite holding two no-to-low growth components). In order to provide a more nuanced middle ground between these, here are some experimental portfolios that blend elements from each to arrive at weights that may be appropriate for a person uncomfortable with or unsuited for either purist approach (specific fund suggestions for these examples can be found further below):
V 1) Aggressive/Accumulator BHPP Hybrid – This portfolio takes a conventional high-stock, low-bond approach, then softens it with Permanent Portfolio components:
PP + 75% Stock & 25% Bonds =
- 12.5% Cash
- 12.5% Gold
- 25% Bonds [50/50 TIPS/LTTs]
- 50% Stock [Total World, Value/Small/EM-Tilted]
V 2) Conservative/Retiree BHPP Hybrid – Oriented toward asset protection over growth, bonds dominate the constituent Lazy Portfolio within this hybrd:
PP + 25% Stock & 75% Bonds =
- 12.5% Cash
- 12.5% Gold
- 50% Bonds
- 25% Stock
V 3) Minimize Fat Tails BHPP Hybrid Variant - Going one step further, additional commodities are introduced into this mix, and low exposure to the pure market is made up for with the inclusion of higher-risk, higher-reward equities.
- 10% Cash
- 10% Gold
- 05% Broad Commodities [or REITs]
- 50% Bonds
- 25% Stocks [Specifically: Risky Equities]
Example 8-Fund Implementation of V 1:
- 12.5% Vanguard Prime Money Market Fund
- 12.5% GLD ETF Held via Vanguard Brokerage
- 12.5% Vanguard Inflation Protected Securities Fund
- 12.5% Vanguard Extended-Duration Treasury ETF
- 12.5% Vanguard Total (US) Stock Market Index Fund/ETF
- 12.5% Vanguard Total International Stock Market Index Fund/ETF
- 12.5% Vanguard Emerging Markets Index Fund/ETF
- 12.5% Vanguard Small Cap Value Index Fund/ETF
Example 8-Fund Implementation of V 2:
- 12.5% Vanguard Prime Money Market Fund
- 12.5% GLD ETF Held via Vanguard Brokerage
- 12.5% Vanguard Short-Term Treasuries Fund
- 12.5% Vanguard Inflation Protected Securities Fund
- 12.5% Vanguard Long-Term Treasuries Fund
- 12.5% Vanguard Extended-Duration Treasury ETF
- 12.5% Vanguard Total International Stock Index Fund/ETF
- 12.5% Vanguard Mid Cap Value Index Fund/ETF
Example 10-Fund Implementation of V 3:
- 10.0% Vanguard Prime Money Market Fund
- 05.0% GLD ETF Held via Vanguard Brokerage
- 05.0% Physical Gold Bullion Holdings
- 05.0% Vanguard REIT Index Fund (or PCRIX or GCC ETF)
- 12.5% Vanguard Inflation Protected Securities Fund
- 12.5% Vanguard Short-Term Treasury Fund
- 25.0% Vanguard Long-Term Treasury Fund (or: EDV ETF)
- 10.0% Vanguard Small Cap Value Index Fund
- 10.0% Vanguard Emerging Markets Index Fund
- 05.0% Vanguard FTSE All-World Ex-US Small Cap Index Fund
It is also possible, of course, to simplify the slices back to four holdings,:
Simplified 4-Fund Agressive (v 4):
- 10.0% Vanguard Short-Term Treasury Fund
- 10.0% GLD ETF Held via Vanguard Brokerage
- 25.0% Vanguard Extended-Duration Treasury ETF
- 50.0% Vanguard Total World Stock Market Index Fund
Simplified 4-Fund Conservative (v 5):
- 20.0% Vanguard Prime Money Market Fund
- 20.0% Physical Gold Bullion
- 40.0% Vanguard Long-Term Treasury Fund
- 20.0% Vanguard Small Cap Value Index Fund
Simplified 4-Fund Fat Tails (v 6):
- 10.0% Vanguard Prime Money Market Fund
- 10.0% GLD ETF Held via Vanguard Brokerage
- 50.0% Vanguard Intermediate-Term Treasury Fund
- 30.0% DGS Emerging Markets Small Cap Value Index ETF
Why not simply choose a Lazy Portfolio or the Permanent Portfolio? Many reasons are possible – neither might be suited to a specific set of goals or, more likely, to a specific person’s risk tolerances and general personality. For some, the idea of holding half their portfolio in gold and cash sounds like giving up too much reward potential on the stock and bond front. At the same time, they might not feel comfortable with only two super-asset classes. Their ideal fit may, therefore, lie somewhere between extremes.
Of course, like any portfolio idea, these examples have pluses and minuses in terms of their complexity, correlation benefits, diversification levels, risk-and-reward profiles and so forth – no one can predict the future, and none of these is meant to be better than either a simple Lazy Portfolio or pure Permanent Portfolio – they are merely food for thinking outside of the strict boxes of either simple and (so far) effective approach.
For additional information on the Permanent Portfolio, CrawlingRoad has excellent resources from articles and historic data to podcast interviews. Additional Lazy Portfolio examples can be found over at Bogleheads on the Wiki section (while ongoing discussions take place in the Forums). Just remember: whatever you choose, don’t be tempted to tinker, even if that means buying just one balanced fund and/or avoiding precious metals.