Book Title: The Lazy Person’s Guide To Investing
Author: Paul B. Farrell
Date Published: 2004
The Lazy Person’s Guide To Investing – Author Background
As outlined by the “Wall Street Journal”, Paul Farrell is the author of nine books on personal finance, economics and psychology, including “The Millionaire Code,” “The Winning Portfolio”, and the “The Lazy Person’s Guide to Investing.” Farrell was an investment banker with Morgan Stanley; executive vice president of the Financial News Network; executive vice president of Mercury Entertainment Corp; and associate editor of the Los Angeles Herald Examiner.
The Lazy Person’s Guide To Investing – Book Summary
The following is a summary of the book chapters and some key words/notes extracted directly from the text.
Part 1 – The Contest Winners
Chapter 1 – The Couch Potato Portfolio is Microwavable
- Scott Burns launched the Couch Potato Portfolio in 1991.
- The portfolio achieved an incredible 10.29 %annual return over the period: 1973 to 1991.
- You only need a 50/50 asset allocation split in two funds, namely the
- 50% in Vanguard 500 index (VFINX) – this can be replicated by the Vanguard Total Stock Market (VTI) ETF; and
- 50% in Vanguard Total Bond Market Fund (VBMFX) – this can be replicated by the iShares TIPS Bond (TIP) ETF
- The sophisticated Couch Potato Portfolio alternative is 75% in the Vanguard 500 index and 25% in the Vanguard Total Bond Market Fund
- There is a once per year adjustment: at the end of year, divide the total amount of the combined funds by 2 and adjust the allocations accordingly
- Refer websites:
Chapter 2 – The World Famous Coffeehouse Portfolio
- In late 1998, Bill Schultheis published a book, “The Coffeehouse Investor” which highlighted the following principles:
- Save – start early, save regularly, trust compounding to do the rest
- Diversify – spread your risks across funds moving on different cycles
- Index – all you need to do is be average and you will come out a winner.
Refer to the coffee house investor website
- The portfolio comprises of a 60/40 stock-bond split with the bond portion reflecting an intermediate term corporate bond index (40% Vanguard Total Bond Market – BND) and the equity portion equally divided between:
- S&P 500 Index (VV) 10%
- Large Value Index (VTV) 10%
- Small-cap Index (IJR) 10%
- Small-cap Value Index (IJS) 10%
- MSCI EAFE International Index (VEU) 10%
- REIT Index (VNQ) 10%
Chapter 3 – Dr Bernstein’s No-Brainer Portfolio
- The no-brainer portfolio is the brainchild of William Bernstein, author of two books “The Intelligent Asset Allocator” and the “Four Pillars of Investing” and financial adviser to high net-worth individuals
- In the words of Cr Bernstein, “if over the past 10 or twenty years you had simply held a portfolio consisting of one quarter each of indexes of large US stocks, small US stocks. Foreign stocks and high-quality US bonds you would have beaten 90 % of all professional money managers”
- Portfolio can be achieved using the following:
- 25% iShares Cor S&P small cap (IJR)
- 25% Vanguard FTSE all-world ex US (VEU)
- 25% Vanguard large cap (VV)
- 25% iShares 1-3 Year Treasury Bond (SHY)
- Coward’s Portfolio alternative can be achieved using the following
- 40% Short term corporate bond index (VFSTX) or SHY & LQD
- 15% Total Stock Market (VTSMX) or VV
- 10% Small-cap Value (VISVX) or IJS
- 10% Large-cap Value index (VIVAX) or VTV
- 5% European Stock index (VEURX) or VGK
- 5% Pacific Stock Index (VPACX) or VPL
- 5% REIT Stock Index (VGSIX) or VNQ
- 5% Small cap index (NAESX) or IJR
- 5% Emerging Markets Index (VEIEX) or EEM
Chapter 4 – A Challenger Jumps in Ring – Scores on Points
- Kiplinger’s keep it simple portfolio
- 25% large cap stock funds
- 25% foreign stock funds
- 25% small cap stock funds
- 25% domestic bond funds
- For better returns over the long term however, Paul Merriman suggests 10 funds, as follows:
- US large cap stocks
- US large cap value stocks
- US small cap stocks
- US small cap value stocks
- International large cap stocks
- International large cap value stocks
- International small cap stocks
- International small cap value stocks
- Emerging market stocks
- Long term corporate bonds
Part 2 – Recess Fun: Testing The Six Laziest Strategies
Chapter 5 – Strategy One – Zero Timing Wins
- Use the autopilot strategy, investing your money immediately and automatically (dollar cost averaging on a regular basis) regardless of market conditions and without thinking about it
- Active stock picking adds virtually nothing to your portfolio’s value, which explains why better than 80% of all funds fail to beat their indexes in any one year.
Chapter 6 – Strategy Two – Frugal Saving Wins
- The consensus is that you don’t get rich, then get frugal. You are frugal, and then you get rich.
- So, how can you be a “frugal person” when it comes to investing? Very simple: Buy low-cost index funds.
- The only reliable indicator of future performances is the expense ratio. Low expense ratios indicate high performance.
- Vanguard I the master of frugality when it comes to funds and the poster boy for cheapskate
Chapter 7 – Strategy Three – Compounding Wins
- Albert Einstein is believed to have said that “there is no greater power known to man than compounding Interest”
- The power of compounding is so simple, yet most people don’t grasp it until its too late. Follow this one rule: start saving today , early in life, preferably in your twenties.
Chapter 8 – Strategy Four – Asset Allocation Wins
- Jack Schwager in his book “New Market Wizards’ pinpointed the great trader’s secret weapon: discipline. “There are two basic reasons whey discipline is critical. First, it is a prerequisite for maintain effective risk control. Second, you need discipline to apply your method without second guessing when choosing which trades to take”
- The second most important ingredient was a sense of mission and passion for what they do. The fact is however, most American investors lack the time, skills and discipline to truly succeed as traders….trading and investing is just not their mission in life
- The simple truth is that you do not have to me a market wizard to build a successful million-dollar portfolio, …you buy quality funds and stocks. You diversity and you let them grow – slowly
- If you want to become a millionaire investor, pick ever “horse in the stock market race”. That is what indexing and diversification are about. So, in summary, create a well-diversified index portfolio that abandons the macho ego trip
- Money Magazine was asked how many funds were required. There recommended portfolio would consist of 6 funds: one growth fund and value funds specializing in small, medium and large companies. Then add two overseas funds, one international and one emerging markets fund.
Chapter 9 – Strategy Five – Buy & Hold Wins
- Buy quality and you hold “indefinitely” using a well diversified asset allocation strategy
- Reasons not to become a trader:
- The stock market is irrational and unpredictable
- The more you trade, the less you earn
- On-line trading makes it easier to lose more
- Investors buy high and sell low, losing at the top and bottom
- Overconfident, we lose, deny and fib about our losses
- Unfortunately, winning traders don’t win much
- The best way of buying quality is simply by investing in a well diversified portfolio of no load index funds strategically allocated across the broad spectrum of the market
Chapter 10 – Strategy Six – Do It Yourself Wins
- In the words of the guru investor, Peter Lynch, “Stop listening to professionals…any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert”
- Slow and steady wins the race
- Making money really is a game of solitaire…Take total responsibility.
Part 3 – Six More Boring, Lazy Portfolios for America
Chapter 11 – The Dummies Ultimate Keep-It-Simple Portfolio
- Eric Tyson puts forward three funds which make up what he calls the “Eric’s Keep-It-Simple Portfolio” (split two thirds domestic and one third international)
- Vanguard Total Stock Market Index Fund
- Vanguard Total International Stock Index Fund
- Vanguard Intermediate Term Tax Exempt Fund
Chapter 12 – Dilbert’s Anti-Weasel Defense Portfolio
- Scott Adam’s 1-page book:
- Make a will
- Pay off your credit cards
- Get term life insurance if you have a family to support
- Fund your 401 (k) to the maximum
- Fund your IRA to the maximum
- Buy a house if you want to live in a house and you can afford it
- Put 6 months expenses in a money market account
- Take whatever money is left and invest 70% in a stock index fund and 30% in a bond fun. Buy from the Fund company and never touch until retirement
- If any of this confuses you, hire a fee based financial planner
- Dilbert’s Anti-Weasel Defense Portfolio:
- 70% Vanguard Total Stock Market Index Fund
- 30% Vanguard Total Bond Market Index Fund
Chapter 13 – Motley Fools Morph into Index Champions
- Fools Portfolio
- Vanguard S&P 500 Index Fund
- Vanguard Total Bond Market Index Fund
Chapter 14 – Idiot-Proof Portfolios for the Financially Challenged
- Never try to time the market; its too much of a gamble. Create a well diversified index portfolio that balances out the peaks and valleys over time
Chapter 15 – Where Do Active Money Managers Put Their Own Money?
- Ted Aronson, a ‘quant’ and active money manager has his personal portfolio setup as follows:
- (40%) Domestic Stock Funds
- 5% Wilshire 5000 (VTSMX)
- 15% S&P 500 Index (VFINX)
- 10% Wilshire 4500 Mid/Small cap (VEXMX)
- 5% S&P Small-cap 600/BARRA Growth (VISGX)
- 5% S&P Small-cap 600/BARRA Value (VISVX)
- (30%) Foreign Stock Funds
- 15% Emerging Markets MSCI-EMGFree (VEIEX)
- 10% Pacific Stock MSCI-PAC (VPACX)
- 5% European Stock Index MSCI-EUR (VEURX)
- (30%) Fixed-Income Funds
- 10% TIPS: Inflation-Protected Securities (VIPSX)
- 10% High Yield Corporate (VWFHX)
- 10% Long Term Treasury (VUSTX)
Chapter 16 – Even Nobel Economists Prefer lazy Theories
- The Nobel Prize Winners’ “Beautiful Mind” Portfolio
- 50% Equities – Vanguard total Stock Market Index Fund
- 50% Bonds – Vanguard Total Bond Market Index Fund
Part 4 – Adventures Outside the Vanguard Box
Chapter 17 – The Care and feeding of your 401(k) Plan
- Max out your 401(k) every year, no matter what
- Build a well diversified portfolio with the funds available in your 401 (k)
Chapter 18 – Happy Hybrids: One-Fund Mini Portfolios
- Which of the hybrids is best? Doge & Cox Balanced stands out. It consistently beats the S&P 500 long term average by a percent or two
Chapter 19 – The ETF Zoo- Spiders, Qubes, Diamonds, Webs and Vipers
- An ETF is the best of both worlds: it tracks an index like a mutual fund. Plus you can trade it like a stock (but you pay a brokerage commission for each trade)
- Calculate your bond ETF allocations first. Buy them first and sit on them. No trading
- You then allocate the remainder to stock ETFs; eg if you have $100,000, you would put $40,000 into fixed-income bond ETF’s first and then the remaining $60,000 to stock ETFs. This means you have 90% in stock retirement ETFs which you never touch. The remaining 10% is to gamble with in a more risky asset class.
- The only way to own ETFs that brings you ahead of index funds is to buy a lot of them and hold on to them.
- Always keep in mind – it’s the portfolio, diversification and you total asset allocations, not the specific funds you pick
Chapter 20 – DRIP, DRIP, DRIPping with No-Load Stocks
- A DRIP is a Dividend Reinvestment Program
- See Charles Carlson’s website for some great information on all things dividends http://www.bigsafedividends.com/
Chapter 21 – You Want To Be the Next Super Mario?
- The website foliofn.com provides the ability to setup and trial different fund portfolios
Chapter 22 – The Superpowered Zero-Funds Portfolio
- Read the Rich Dad, Poor Dad books
Chapter 23 – Lazy Portfolios for Not-So-Lazy Kids
- Ric Edelman advises that “if you set aside $5000 for a newborn for 65 years and if you didn’t touch it the entire time, and if the money was able to earn an average of 10%annualy, you’d have $2.4million.
- This highlights again the power of compounding and the need to start early
Part 5 – When Laziness Fails You and you Are Itchin for Some Action!
Chapter 24 – Sssssizzle..Fizzzz…That’s Your Brain Frying on a Hot Stick
- Our brains can sometimes make us act irrationally. Take your time with investments, don’t rush in. Meditate or do some hard physical exercise as a way of distracting us away from making a rushed decision or investment we will later regret.
Chapter 25 – Plan B: How Investors Learn to Live with Two Brains and a Split personality
- Here’s how a two-portfolio strategy works for a street-smart investor who cannot yet comprehend the simple wisdom of passive index investing:
- Brain #1 (90%) invests your untouchable portfolio – lower risk, diversified, index funds or high quality shares, not touched until retirement
- Brain #2 (10%) invests your mad-money portfolio – higher risk investing; if you lose it, you stop
The Lazy Persons Guide To Investing – Closing thoughts
I enjoyed reading this book. Quite often we way over think investing and as such, either do nothing or try to many different options. This book highlights that investing can be easy and rewarding in the long run. Don’t expect riches over night but rather concentrate on saving, investing early, investing in a diversified set of low cost, high quality index funds and then letting time do the rest.
Giving Paul the final say “Lazy portfolios are keep-it-simple, no hassle, low stress, time-saving, low-maintenance portfolios that work in the background on autopilot so that you can get on with the business of everyday life”.
If you enjoyed this book review, you will enjoy my review of the classic, “One Up On Wall Street“.
Read, learn, enjoy, be persistent and most importantly, take action!