'No-brainer' portfolios OK, but watch allocations

QHave a fragile recovery, high gas prices and what seems like endless volatility in the market changed the wisdom of the "no-brainer" portfolio as the long-term mix of investments -- say 25 years in my case -- for a traditional IRA?

TIM

AIt all depends what you mean by a "no-brainer" portfolio. The classic no-brainer contains the Vanguard Total Bond Market index fund; the Vanguard S&P 500 index fund; the Vanguard Small Capitalization index fund, and Vanguard Total International Stock Market index fund.

And yes, I like the idea of building a long-term portfolio on a foundation of low-cost, broad-based index funds such as the ones Tim mentioned. Comparable index-fund-based strategies include "Couch Potato," the "Coffeehouse," and my favorite name at least, the "Margaritaville" portfolio (with Jimmy Buffett playing in the background).

The payoff from these strategies is that your investments will match the market index minus a small fee and you don't incur big trading costs. You focus on long-term asset allocation -- how much should you have in cash, stocks, bonds, and so on -- rather than attempting to follow the latest fashion on Wall Street.

Certainly, actively trading investments is hazardous to your finances. I recently came across this statement from Howard Marks, chairman of Oaktree Capital Management:

"It would be great if we could predict what economies and markets will do, move in and out with perfect timing, foresee which industries and companies will fare best, and hold only the securities with the highest returns. But to paraphrase John Kenneth Galbraith on forecasters, I feel there are two kinds of investment managers: those who can't do these things and those who don't know they can't do these things."

Investing is probably the most competitive business in the world. Astronomical sums change hands every day around the globe as millions of investors, many of them armed with powerful computers and sophisticated software, try to gain an edge.

The bottom line: Forget trying to beat the market. The various kinds of no-brainer retirement portfolios are better than most of the offerings by Wall Street firms.

That said, the "equal parts" over the long-haul bothers me. It might make sense for you to have an equal parts portfolio and for me to be far less exposed to stocks in my allocation, and so on. About a decade ago I had a fascinating discussion with Paul Samuelson, the late Nobel laureate. His pioneering research informed much of what is called modern portfolio theory, including an appreciation of equities in a long-term portfolio.

Yet during the interview he emphasized whether you included equities in a portfolio depended on your attitude and ability to absorb stock market risk.

"For my late mother," he said, "her level of risk tolerance called for a very small equity share."

So, I favor a modified, index-fund-based no-brainer strategy. Match your investment strategy using broad-based index funds to retirement goals. Periodically rebalance your portfolio (a straightforward discipline for buying low and selling high) and reduce the risk in your portfolio as you age. 

Chris Farrell is economics editor for "Marketplace Money." Send your questions to cfarrell@mpr.org.

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