This is part three of my time with The Lazy Person’s Guide to Investing, a book on the Personal MBA Personal Finance reading list. To read all posts related to this book, see The Lazy Person’s Guide to Investing on JustAJot.

Part Three: Six More Boring, Lazy Portfolios for America

This book is beginning to get boring. We’ve already covered the main topics. Save. Diversify your investments while avoiding market timing. Buy and hold those investments. And now we’re driving point of basic portfolio management. In part three, Paul Farrell shows that many other “lazy portfolios” are merely derivatives of the Couch Potato Portfolio discussed in detail in part one.

There are two pieces I want to re-print here, two that I found incredibly important. The first is a recollection of an old story from Napoleon Hill’s Think & Grow Rich:

As I recall it, the members of the parish were delighted that they had a new preacher. But after a few weeks, they were getting worried. The reverend had delivered the exact same sermon his first three Sundays at the pulpit. And after the third time, nervous eyes darted back and forth across the aisles as parishioners wondered if they’d made a mistake. Telephones were ringing off the hook as rumors kept flying — did we hire someone with some kind of memory problem?

Finally one of the deacons got tapped for the uncomfortable task of confronting the new minister. He arranged a private meeting in the parish rectory. He was mighty anxious: “Reverend, I … that is, we … well, sir, you see … the deacons were wondering if you were aware that you’ve been repeating the same sermon the last three Sundays?”

“Yes, I am,” the new minister replied through piercing eyes, “and I’ll keep doing it until they get the message.”

That story makes me giggle. Simple concepts take so long to truly understand. If they didn’t, one should easily be able to stop reading after the first part of this book. And the next piece, Scott Adams’s one-page book on personal finance:

1. Make a will.
2. Pay off your credit cards.
3. Get term life insurance if you have a family to support.
4. Fund your 401(k) to the maximum.
5. Fund your IRA to the maximum.
6. Buy a house if you want to live in a house and can afford it.
7. Put six months’ expenses in a money market account.
8. Take whatever money is left over and invest 70 percent in a stock index fund and 30 percent in a bond fund. Buy them directly from the fund company and never touch them until retirement.
9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issue), hire a fee-based financial planner, not one who charges a percentage fee based on your portfolio’s size.

The rest of part three explains why Vanguard is such an awesome company for index fund investments (HINT: LOW EXPENSE RATIOS!).

This is part two of my time with The Lazy Person’s Guide to Investing, a book on the Personal MBA Personal Finance reading list. To read all posts related to this book, see The Lazy Person’s Guide to Investing on JustAJot.

Part Two: Testing the Six Laziest Strategies

It’s okay to be an average investor. Try to do better and you’ll do far worse. Some will take the challenge and learn enough about investing and be magnificent enough to truly beat the market. Those are the exceptional few. Many others will also take the challenge and let their emotions or intellect get the best of them, only to fail like so many before them. Sometimes it pays to be average. Investing is one of those times.

For the adventurous, you can have a piece of each pie. The common practice is to allocate 90% of your investment money to safe, diversified investments. The other 10%? Speculative ventures. If you’re in the group that believes you can beat the market, use that 10% for 10 years to discover how you fair. You’ll know then if you should reallocate and change up your overall investment strategy. Otherwise, keep to the 90/10 ratio.

Part two of The Lazy Person’s Guide to Investing discusses the “six laziest strategies” to “find more time for the important things in life.” Each strategy is discussed in a separate chapter. The discussions include examples that clearly demonstrate the effectiveness of each. The six strategies discussed are:

1. Market timing: avoid it.
2. Saving and frugality.
3. Compounding: there is no greater power known to man.
4. Diversify. Yes, it’s okay to be average.
5. Buy and hold. And hold. And hold. And hold.
6. Do it yourself.

The investment aspect of personal finance really comes down to just a few simple steps. Research index funds for investments that you would like to hold forever (and only draw out of for retirement). Save as much as is comfortable for the investments. Do it regularly; every paycheck, or every month, and make investing automatic. And start now. Like, right now.

This is part one of my time with The Lazy Person’s Guide to Investing, a book on the Personal MBA Personal Finance reading list. To read all posts related to this book, see The Lazy Person’s Guide to Investing on JustAJot.

Introduction

The Lazy Person’s Guide to Investing, “a book for procrastinators, the financially challenged, and everyone who worries about dealing with their money.” I’ll refer to The Lazy Person’s Guide to Investing from now on as TLPGTI. TLPGTI was written by Paul B. Farrell, J.D., Ph.D., a columnist for CBS MarketWatch. This day 1 post covers part 1 of the book (chapters 1-4).

Investing is very, very easy

TLPGTI teaches us that “investing is very, very easy.” The first part of the book is dedicated to “America’s three laziest portfolios”:

1. The Couch Potato Portfolio
2. The Coffeehouse Portfolio
3. The No-Brainer Portfolio

I’ve long been looking for a book with straight-up investing advice. Individual stock recommendations are a bad idea, but index funds? YES! Diversity and proper asset allocation make smart (and lazy) people rich (slowly, and in the long run). Too many parenthetical notes? Maybe. (Index funds are cool.)

The point that TLPGTI makes is obvious: investing is simple. Don’t make it complicated. Start now if you aren’t already. And if you already are “investing” and you have a complicated portfolio of common stock and you’re constantly worried about the value of each? There’s a simple little acronym I subscribe to: KISS (Keep It Simple Stupid). Get out of your stocks (when it makes sense to) and learn a little about no-load index funds as discussed in TLPGTI and referenced in the portfolios below.

The Couch Potato Portfolio

The Couch Potato Portfolio was created by Scott Burns, a syndicated financial columnist with the Dallas Morning News.

1. 50% — Vanguard 500 Index (VFINX)
2. 50% — Vanguard Total Bond Market Index (VBMFX)

Introduced in 1991, the Couch Potato Portfolio was back-checked from 1973 through 1991. During that time, it performed with a 10.29 percent average annual return, an incredible return given the 1982 bear market and the crash of 1987. From 1991 to 2001, it continued to perform at basically the same rate with a 10.37 percent average annual return.

If want to be more aggressive in your investments, the Sophisticated Couch Potato Portfolio may be what you’re after. Invest 75% in the Vanguard 500 and 25% in the Vanguard Total Bond Market. Less aggressive? 75% in bonds, 25% in stocks. Or, use other similar percentages depending on your situation. It’s damn simple.

The Coffeehouse Portfolio

The Coffeehouse Portfolio was created by Bill Schultheis in 1998. Bill is a former Salomon Smith Barney broker turned financial adviser. He wrote a book on the coffeehouse investing strategy, titled The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life.

1. 10% — Vanguard 500 Index (VFINX)
2. 10% — Vanguard Large-Cap Value Index (VIVAX)
3. 10% — Vanguard Small-Cap Index (NAESX)
4. 10% — Vanguard Small-Cap Value (VISVX)
5. 10% — Vanguard International (VGTSX)
6. 10% — Vanguard REIT Stock Index (VGSIX)
7. 40% — Vanguard Total Bond Market Index (VBMFX)

The Coffeehouse Portfolio returned an annual average of 11.42 percent from 1991 to 2001. While having the highest rate of return among America’s three laziest portfolios, it has the steepest of investment minimums with an amount of $30,000 dollars (more on that later).

The No-Brainer Portfolio

The No-Brainer Portfolio was created by William Bernstein, a financial adviser to high-net-worth individuals, SmartMoney columnist, and author of two books, The Intelligent Asset Allocator and The Four Pillars of Investing. He also happens to be a physician and practicing neurologist.

1. 25% — Vanguard 500 Index (VFINX)
2. 25% — Vanguard Small-Cap Index (NAESX)
3. 25% — Vanguard European Stock Index (VEURX)
4. 25% — Vanguard Total Bond Market Index (VBMFX)

There is also the Coward’s No-Brainer Portfolio (more conservative asset allocation):

1. 40% — Vanguard Short-Term Investment-Grade (VFSTX)
2. 15% — Vanguard Total Stock Market (VTSMX)
3. 10% — Vanguard Small-Cap Value (VISVX)
4. 10% — Vanguard Large-Cap Value Index (VIVAX)
5. 5% — Vanguard European Stock Index (VEURX)
6. 5% — Vanguard Pacific Stock (VPACX)
7. 5% — Vanguard REIT Stock Index (VGSIX)
8. 5% — Vanguard Small-Cap Index (NAESX)
9. 5% — Vanguard Emerging Markets Stock (VEIEX)

Thoughts

There is a small problem in a beginning investment strategy with Vanguard index funds: a $3,000 minimum investment per fund. There is a $6,000 up-front cash need to even begin with the Couch Potato Portfolio.

If you happen to have $30,000 sitting in a bank account that you’re ready to invest, go straight for the Coffeehouse Portfolio. But, if you’re like most people and don’t have a dime invested, here’s how I would begin if I had to start all over:

Save. Don’t be stupid and stuff cash under your mattress. Put your savings in a bank, and not just any bank, and not just any account. Place your savings into a high-yield earning savings account. ING Direct is a wonderful choice.

After saving enough to make the minimum investment into the 50/50 Couch Potato Portfolio, set-up an account with Vanguard and make the investments. Set-up your accounts to invest as much as you can towards your Vanguard accounts automatically each paycheck.

My plan is to transfer my current Roth IRA account to Vanguard when the time is right (I believe I will have to sell off my current investments within the Roth IRA first). When everything is sold off, I’m going to start my Vanguard investments with the Couch Potato Portfolio, at 75% VFINX, 25% VBMFX. I will continue automatic investments into the funds every two weeks — that’s 26 times a year (next year, 2009, the maximum for Roth IRAs will hopefully be greater than $5,000, so this won’t be an issue). Once I have enough money to reallocate according to the Coffeehouse Portfolio, I will do so, selling off portions of VFINX so I can re-invest in the other funds as well.