Roth: Simple ETF Strategies Work

January 24, 2014

Investors should strive to keep things simple, Allan Roth says.

What sector will outperform in 2014? Will emerging markets regain their lost mojo? Should you shorten bond durations as economists uniformly predict rate increases? As I’ll explain, asking questions such as these leads to lower investor returns.

I’ve long said that a simple three-fund portfolio will beat the vast majority of investors. This simple portfolio can easily be constructed with ETFs from families such as Vanguard, iShares and Schwab. Here, for example, are the funds using the Vanguard ETFs:

With these three funds, investors own virtually every publicly traded stock on the planet, as well as all fixed-rate investment-grade bonds in the U.S., with dirt low costs.

This ETF portfolio, also known as the Second Grader portfolio, is one of the MarketWatch Lazy Portfolios Paul Farrell often writes about. It was designed by my son Kevin—with a little help from dad—when he was eight years old.

With so much time on his side, an 8-year-old can be far more aggressive than most adults, As of Jan. 17, 2014, this simple portfolio of 60 percent U.S. stocks, 30 percent international stock and 10 percent bonds has had the following annualized returns:

  • One year: 19.93%
  • Three years: 10.53%
  • Five years: 16.57%
  • Ten years: 7.12%

According to MarketWatch, of the eight Lazy Portfolios, the Second Grader portfolio is in either first or second place in all of the time frames.

That’s not bad, considering that the other portfolios were constructed by the likes of passive investing advocate William Bernstein and the Yale University endowment’s David Swensen.

Even more conservative allocations also worked quite well.

Here are the 10-year results through Dec. 31, 2013, for the aggressive, moderate and conservative Second Grader portfolios, which are 90 percent, 60 percent and 30 percent in stocks, respectively.

2nd_Grader_Portfolio_ 10-Year_Performance

Why does simple brilliance work?


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