The Coffeehouse Portfolio is a popular “Lazy Portfolio” that slices up the traditional 60/40 stocks/bonds portfolio. Here we'll look at its components and the best ETF's to use in its construction.
Interested in more Lazy Portfolios? See the full list here.
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Contents
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What Is the Coffeehouse Portfolio?
The Coffeehouse Portfolio was created by a financial adviser named Bill Schultheis. His philosophy is to adopt a set-and-forget portfolio, “ignore Wall Street,” and “get on with your life.” I can get behind that. His book, basically titled the same thing, can be found here.
Schultheis basically took the classic 60/40 Portfolio and tilted toward risk factors that we'd expect to pay a premium via small-cap stocks and value stocks.
The Coffeehouse Portfolio looks like this:
- 10% Large Cap Stocks
- 10% Small Cap Stocks
- 10% Large Cap Value
- 10% Small Cap Value
- 10% REITs
- 10% International Stocks
- 40% Bonds
The Coffeehouse Portfolio takes the traditional 60/40 stocks/bonds portfolio and puts a barbell on stocks and tilts Value. I like both of those ideas, and I do it in my own portfolio. Unlike the All Weather Portfolio and the Golden Butterfly Portfolio, the Coffeehouse Portfolio steers clear of gold. I can get behind that idea too. Also unlike those 2, the Coffeehouse Portfolio is not really meant to minimize volatility and drawdowns. Rather, it uses the established Size and Value factor premia to overweight small-cap stocks and Value stocks, and overweights REITs for a potential diversification benefit.
The primary criticism is that this portfolio under-represents international stocks. About half of the global stock market is outside the U.S. The Coffeehouse Portfolio inherently has what's called home country bias, only allocating 10% to international stocks.
The prescribed Coffeehouse Portfolio doesn't actually even specify the type of bonds to use for the 40% slice. The natural inclinations would be Total Bond Market, Total Treasury Bond Market, or Intermediate Treasury Bonds, all of which should behave pretty similarly. You could incorporate international bonds here if you want, utilizing BNDW (Vanguard's total world bond market ETF). For the sake of simplicity in this post, since most investors seem to actually prefer home country bias, I'm going to use GOVT, an ETF from iShares that tracks the ICE U.S. Treasury Core Bond Index, i.e. a total treasury bond market fund. It's weighted average maturity is 8.5 years, so it behaves much like an intermediate treasury bond fund. Other sensible choices for that 40% slice would be:
- BND (Vanguard total US bond market)
- BNDW (Vanguard total world bond market)
- half BND, half BNDX (Vanguard total US bond market, Vanguard total ex-US bond market)
- VGIT (Vanguard US intermediate treasury bonds)
- half GOVT, half IGOV (iShares total treasury bond market, iShares ex-US treasury bond market)
Coffeehouse Portfolio Performance
Going back to 1993, here's the Coffeehouse Portfolio's performance vs. an S&P 500 index fund and its 60/40 benchmark through May, 2022:
As we'd expect, the Coffeehouse Portfolio achieves a higher risk-adjusted return (Sharpe) with lower volatility than the S&P 500, but the S&P beats it on strict CAGR.
Notice how the Coffeehouse Portfolio basically traded off decades of outperformance with its 60/40 benchmark. This is due to the cyclical nature of the aforementioned Size and Value factor premia as well as the addition of REITs in the portfolio.
Coffeehouse Portfolio ETF Pie for M1 Finance
M1 Finance is a great choice of broker to implement the Coffeehouse Portfolio because it makes regular rebalancing seamless and easy, and it has zero transaction fees. I wrote a comprehensive review of M1 Finance here.
Utilizing mostly low-cost Vanguard funds, we can construct the Coffeehouse Portfolio pie with the following ETF's:
- VOO – 10%
- VB – 10%
- RPV – 10%
- VIOV – 10%
- VNQ – 10%
- VXUS – 10%
- GOVT – 40%
You can add this pie to your portfolio on M1 Finance by clicking this link and then clicking “Add to Portfolio.”
Are you nearing or in retirement? Use my link here to get a free holistic financial plan and to take advantage of 25% exclusive savings on financial planning and wealth management services from fiduciary advisors at Retirable to manage your savings, spend smarter, and navigate key decisions.
Disclosures: I am long VOO in my own portfolio.
Interested in more Lazy Portfolios? See the full list here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a research report. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. Hypothetical examples used, such as historical backtests, do not reflect any specific investments, are for illustrative purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
Are you nearing or in retirement? Use my link here to get a free holistic financial plan and to take advantage of 25% exclusive savings on financial planning and wealth management services from fiduciary advisors at Retirable to manage your savings, spend smarter, and navigate key decisions.
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