Lazy Portfolios

We're at the end of the month and hitting the deadline for 401(k) enrollments. So ... time for an article about how to out-perform Wall Street sharpies:

There are 95 million Main Street investors in America. Want to buy stocks? You have no choice. You gamble your hard-earned money, actively trading retirement money at Wall Street’s casinos. You can’t win. ...

Call it behavioral economics, brain science or just plain investor psychology, the fact is your brain is a brilliant computer, if you use it right. Most investors either don’t, or more likely, the Wall Street casino operators secretly hire thousands of high-priced behavioral-science experts who understand your brain’s quirky bias better that you. So they help traders develop super-sophisticated computer algorithms that are virtually impossible for Main Street investors to win.

Get it? Not only is the investor’s brain overloaded and prone to forget too much, but Wall Street casinos are sabotaging your brain’s computing system with viruses and malware so your brain can’t think straight. In fact, the vast majority are losers who can’t even beat an index fund.

As behavioral-finance guru Richard Thaler neatly put it: Wall Street casinos need investors “who are irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold overpriced assets.” Yes, the croupiers are constantly manipulating your mind.

Yes, the games are rigged, the cards are marked, the house always wins, and yet the great American spirit drives us. Of course you have to ignore study after study proving that the vast majority of investors believe they are one of the rare above average brains who can beat Wall Street casinos and market averages. ...

[Lazy Portfolios] are designed for the vast majority of Americans, because all eight portfolios involve no active trading. They really are perfect for passive investors who hate giving away a third of their money to Wall Street casinos. Rebalancing is done when you add new money to your portfolio.

Lazy Portfolios, long-term winners beating Wall Street casinos. ...

Warren Buffett currently has a bet going with some hotshot hedge fund managers: The S & P 500 index against their hedge funds. After five years, the index fund is winning:

It's halfway time in the 10-year stock market wager sometimes called The Million-Dollar Bet—that's Warren Buffett backing the performance of an S&P index fund vs. a New York money manager backing five funds of hedge funds—and there's double-barreled news.

Item One: For the first time since the bet started five years ago, Buffett has moved ahead—by an okay margin to boot.

Item Two: For the first time ever as well, both sides have crawled out of the ditch (though the funds of funds barely made it) and are showing positive results. ...

What does Buffett know? That hedge funds have high costs, index funds don't, and the vast majority of hedge fund managers aren't smart enough, or nimble enough, to make up the difference.

It's really simple math.

The closest thing the TAG 401(k) Plan has to "lazy portfolios" is a half dozen Vanguard Target Funds. These funds are inexpensive and broadly diversified across asset classes, and they do all the heavy lifting, automatically rebalancing the money that goes into them.

It's about as mindless a way to invest as any method I can think of. It's also about the most efficient.

Who says so? Warren Buffett.