The Columbia Journalism Review has an article entitled Mad Money, Bad Blood in which they follow up on last summer’s story from Barron’s about Jim Cramer’s stock picking performance on Mad Money. The article focuses mainly on the disagreements between Barron’s and CNBC.

But the article’s author concludes that the Barron’s piece is sound. And I particularly agree with the author on this point, something that I have been saying also:

First, and foremost, CNBC is wrong to air a show that is centered on stock picking without tracking its own performance or even keeping a record, using whatever criteria it chooses, of the stocks it picks.

Either that or come out and say, "Do not trade on these recommendations."

Too bad the Barron’s article didn’t use the research we conducted here at the Mad Money Machine in both 2006 and 2007 that showed experimentally that following Jim Cramer’s stock picks lagged the markets.

I don’t know if anyone ever reads comments to the blog postings, so I will think about raising some of them to the level of a posting itself. Here’s the first example:

wizkid writes in Some Lazy Portfolio Entries Backtested:

OK – Ready to audit the calculations.
Please define the calculation of Return and Risk using the multiple periods.
Is return – average annualized return, compounded return with reinvesting dividends, rebalanced annualized return, etc. etc.
Is the risk based on monthly returns, monthly rolling etc.

Explain the reason for the timeframe – why Aug 2000 as the start date?

Great job on comparing the portfolios!

To which I replied:

Oh excellent! Love a 2nd pair of eyes.

I started with August 2000 because if I went back further in time, VIPSX (Vanguard Inflation Protected Securities) didn’t exist prior to that (at least according to Yahoo). And it is used in several portfolios.

I pull monthly “Adjusted” historical stock quotes from Yahoo finance (using that free tool RCHGetYahooHistory) These presumably account for reinvested dividends and for things like splits.

I calculate but do not report the annualized return and annualized risk for each fund. Then I also calculate and report the total portfolio’s return and risk, as below:

Five columns are used in the spreadsheet for each fund:
Date, Adj Close, Normalized, Gain, Value
Date = the first trading day of each month
Adj Close = the funds value brought back from Yahoo including (subtracting) reinvested dividends
Normalized = first month, fund value starts at 1. Each subsequent month therefore shows the total gain
Gain = delta in the value between each month. This is used to calculate the annualized standard deviation.
Value = this fund’s contribution to the total portfolio. Basically, multiply the Normalized column by the fund’s percentage in the portfolio

Then to compute the returns and risk on the total portfolio, I add up all the Value columns for each month, calculate another monthly gain difference column for the total portfolio, compute the total annualized standard deviation, and report the annualized return as:

=+(Last value/First value)^(1/((End date-Start date)/365))-1

I calculate Annualized Standard Deviation as
=STDEV(RANGE*SQRT(12)) where RANGE is the gain column (each monthly difference in value).

It takes about a minute for the spreadsheet to load as it draws all the stock histories from Yahoo.

I DO NOT PERFORM REBALANCING. I should probably do this, huh? Will have to think about how to code it up in Excel.

Suggestions for improvement greatly welcomed.

From the 66 entries in the Lazy Portfolio Smackdown game, I have taken these 19 portfolios in which all component funds existed back on 1 August 2000 through 31 January 2008 and computed their Return vs. Risk profile. To see the components of each portfolio, go to the Portfolios page and find the ID number for the portfolio. [Note, in some cases I substituted regular index funds for Admiral shares, mutual funds for their ETF equivalent, or other similar but not identical funds... such as VGSIX for FIREX in one case. And on lew's portfolio I cheated and started PCRIX (PIMCO CommodityRealRet Strat Instl) on 1 Jan 2003.]

The graph below plots the values from the above table. The best place to be is top and left. Note how you could almost draw a line from bottom left to top right. That would be the efficient frontier line. The idea is that the more risk you take, the more you should be rewarded. If a winner were to be awarded in each of three risk bands (0-8%, 8-16%, and 16%+) based upon this graph it looks like HAZEL, Jennifer & Mark, and poulinbob would each get a copy of Index Funds: The 12-Step Program for Active Investors. Although Kevin Ucker and Bev and Mike Cote have it going on too.

It is worth comparing these results with the Professionals I showed in a previous posting.

And just to see what you would have gone through in the past one year, here is how the portfolios did since the start of 2007:

At the Lazy Portfolio Smackdown page, I have put in a table showing the returns of all entries into the game thru the end of January. No surprise that most of the portfolios are down. The exceptions being the clever China Bear portfolio and a commodities-heavy portfolio.  What I intend to do is to show the standard deviations of these portfolios over the long term. That is hard to do for ETF portfolios, obviously. Here are the long term (well, since August 1st 2000 at least) risk vs. reward results for the professional lazy portfolios that invested in mutual funds.

Some of the IFA Index Portfolios are shown in circles. Notice how as the portfolios take on greater risk, they also achieve greater return. Notice how the IFA Index Portfolios generally have greater return for the same amount of risk than the other portfolios. There is a single outlier in the Scott Burn Six Ways from Sunday Portfolio. So let’s take a detailed look at it.

This portfolio returned 11% annually with 9% risk. So how did Scott Burns do it? Looks like he got a good return on bonds which have lower volatility than stocks while also getting great returns on REITS and in the specific sector of energy. How did his portfolio do recently? Also, not too bad. As you see on the Lazy Portfolio Smackdown page, the portfolio dropped only -2.91% in January. Again, those bond funds helped cushion the blow.

The following comparison takes a look at the portfolios since August 2006. This places more heavy emphasis on the poor performance of REITS and small cap US stocks in 2007. Not fair to compare them on such a short time span, but there it is.

We can see the out-performance of Ted Aronson’s heavily-weighted emerging market portfolio. It gained 10.48% with 10.21% risk in the 1.5 recent years. He has 20% in VEIEX the Vanguard Emerging Markets fund. It gained 28.63% over the period.

You can see the components of all portfolios on the Lazy Portfolio Smackdown page.

James in south Florida alerted me to a great feature in the Canadian MoneySense magazine of Feb/Mar 2008 entitled Child’s Play: The Couch Potato Portfolio in which they describe lazy investing and using passively managed index funds instead of actively managed funds. Here’s a snippet:

Let’s say you have a $200,000 portfolio. This year alone you would save about $4,000 by becoming a Couch Potato investor rather than an investor in actively managed mutual funds. Over a few years, assuming you reinvested all of your savings, the difference would grow and grow, because the money you would be saving would compound on itself. Assuming typical rates of return, the money you would save by becoming a Couch Potato would be more than enough to buy you a luxury car in 10 years’ time even if you were never to invest another cent in your portfolio.

There are several links to click around to get the whole story, but they are worth a look. They compare the performance of the Couch Potato portfolio against the Canadian stock index. Hey, I gotta take a look at making sure I own some of that Canadian stock index! (Canadian stocks might NOT be a part of your international index fund!) Thanks James for the tip off.

I’ve been lazy about getting the 2007 Lazy Portfolio Results reported to you. But here they are now. You can see the details of the portfolios here.

Ted Aronson’s portfolio did well because it’s equity portion was composed of 25% emerging markets VEIEX which went up 39% in 2007. He only had 6% in Small Cap Value VISVS which went down 7.1%. His overall 13.6% return was pretty good for the year. 

Scott Burns’ portfolios came in 2nd and 3rd. His Margarita portfolio has only two equity funds split equally between Total Stock Market VTSMX and Total International Stock Market VGTSX which went up 5.5% and 15.5% respectively. This is the laziest of the lazy portfolios and amazingly did really well last year.

The worst performer? Ben Stein’s "safe" portfolio for retirees that relied on great dividends. But you know, if you didn’t sell, and instead reinvested the dividends, it might not be a bad deal in the long run because those reinvested dividends are buying stocks cheaply right now. As Jeremy Siegel says in his book The Future for Investors, dividends were one of the keys to big returns in stock investments.

Here’s the breakdown of the portfolios I created:

Win valuable prizes and fame by playing the Mad Money Machine Lazy Portfolio Smackdown Game in 2008: Email me your Lazy Portfolio before 2 January 2008 to enter!

In 2006 we had a portfolio smackdown between a portfolio of Cramer’s recommended stocks that I selected vs. a basket of ETFs I bought and held. The ETFs won. In 2007 we featured a portfolio smackdown between Cramer’s recommended stocks that 20 volunteers selected vs. the IFA Indexfolio 100. It is neck and neck, meaning being lazy must win, right? So next year in 2008 I would like to create a new competition I’ll call the Mad Money Machine Lazy Portfolio Smackdown in which we pit all the various lazy portfolios against one another. We will be judging not only on return but also risk, as measured by standard deviation. The Mad Money Machine Lazy Portfolio Smackdown will of course feature the IFA Indexfolios, which are the gold standard of reward vs. risk portfolios. We will also include the other lazy portfolios that I have mentioned here previously. But also to make this fun and community-involved, I will include YOUR suggested lazy portfolio.

The rules are simple:
1. Create a portfolio of ETFs or Mutual funds (not individual stocks!) and indicate the percentage holding of each fund. Please limit the number of funds to 15 or fewer as anything more than that is not lazy.
2. Email the ticker symbols and percentages to me at Feedback AT MadMoneyMachine dot com.
3. I will calculate on a weekly basis the YTD return of the portfolio and the YTD standard deviation.
4. I may also try to go back in time with the portfolio to show its historical annualized return and annualized risk. Obviously, most ETFs don’t have any long history, so I may use substitute funds.
5. Three winning portfolios will be selected based upon closing prices December 31 2008 and will be the ones that have the highest reward vs. lowest risk for the year in each of three deciles: 0% to 8% risk, 8% to 16% risk, and 16+% risk.
6. Winners will receive a copy of Index Funds: The 12-Step Program for Active Investors by Mark Hebner of Index Funds Advisors at IFA.com, will be crowned Lazy Portfolio Manager of the Year, and other valuable awards to be determined!
7. Entries must be received before 2 January 2008 so act quickly.

In his new book, Jim Cramer’s Stay Mad for Life, he lists some mutual funds he likes. I thought I would look at a portfolio of these funds. I selected only those that existed on 1 Jan 2000. The results here are from then through 1 Oct 2007. Two things to notice: the risk seems higher than you may want and the expense ratio is also higher than you may want. The next thing an intelligent investor would do is to determine if all market sectors are covered by these funds. One could use Morningstar’s Instant X-Ray tool, for example. Would you own any REITS or Emerging Market exposure by buying these funds? How much international? Of course, being actively managed, you’d never really know would you? Another thing to think about is what is the turnover ratio of each fund. In a taxable account this would mean bad things for you. I don’t see an advantage of buying any of these over a diversified portfolio of index funds.

The "Cost per $100k" column indicates how much each fund would cost you for every $100,000 in your total portfolio. For every $100k in the portfolio, this would cost you $1,226 per year. That is higher than a typical lazy portfolio which usually comes in at about half of that.

Results thru 11 December 2007 show a 14% annualized return and a 16% annualized risk.

You’ve used the IFA Benchmark Your Portfolio tool to review the performance of the Index Funds Advisors portfolios. They give you the return and the risk for each of their 20 IndexFolios over a timespan you select. I thought it would be cool to do the same thing for several of the Lazy Portfolios (click to see the make-up of each portfolio). Remember that nifty tool from a couple of shows ago? The StockMarketFunctions add-in for Excel can grab historical quotes from Yahoo!. Now I’ve developed a spreadsheet where I can plug in up to 10 ticker symbols and the percentage allocation to each stock or fund and then get out the total return for the portfolio and also the annualized risk. What is annualized risk? It is the standard deviation of monthly returns multiplied by the square root of 12. Not sure why it works and don’t really care. Anyway… I’ve plugged in some of the Lazy Portfolios to see their returns and risk for the past seven years, from 1/1/2000 until 10/1/2007. I’ve sorted by return and also sorted by risk.

Here’s the result, first sorted by annualized return over the nearly seven years:

Now, sorted by lowest risk:

You might enjoy seeing it as a scatter plot:

Now take a look at the same kind of chart only over a longer time span and INCLUDING THE DOW JONES 30 STOCKS!

Going farther to the right means you are taking on more risk. Basically, you want to find an investment at the upper left. The line that crosses from lower left to upper right is the “Efficient Frontier.” I think this is one of the most important concepts to understand in all of investing. That is why the icon for the Mad Money Machine incorporates it.

Note: I cannot guarantee the accuracy of these results. More likely, I might guarantee there is a mistake somewhere. But in general, the numbers give a good idea of the relative risk vs. reward results. No taxes or advisor fees were removed from the results.

Here’s a summary of how the “Lazy Portfolios” (as seen in The Kirk Report at thekirkreport.com) have done through the 3rd Quarter of 2007. I will provide more detail of the makeup of each portfolio here and on the podcast. I also show each portfolio’s annualized performance for the previous 1.75 and 2.75 years.

NOTE THAT THESE ARE THE EQUITY ONLY PORTIONS OF EACH PORTFOLIO. I REMOVED THEIR BOND COMPONENT (IF ANY).

Sorted by long-term performance:

Now the short-term, YTD sort:

Here is the detailed holdings of each portfolio. The 3rd column is the original portfolio percentage including bonds. The last column shows the equity weightings without bonds.

Details of IFA IndexFolio 100 are here.

ravjim asked, and I hereby answer: how would the do-it-yourself portfolio from show 59 have stacked up against the lazy portfolios?

So, here’s the portfolio I constructed of Vanguard (and one Bridgeway) funds to try to match the IFA Indexfolio 100:

You can compare that against the IFA Indexfolio 100 to see how I tried to capture each asset class.

And here is how the performance compares:

The conclusion must be that when you allow Index Funds Advisors to help you, you get a twofer: help, and better returns.