Let’s say you were an oracle able to predict the future to an uncanny degree at the beginning of this year. You anticipated the uprisings in Tunisia and how they would spread throughout the Muslim world leading to the overthrow of Hosni Mubarak and other long-serving authoritarian potentates.
Among the affected countries were some of those with the largest proven oil reserves in the world. You also knew that the price of crude oil would skyrocket over 15 percent in the first quarter of 2011.
Not only did you forecast the Middle East unrest, but somehow you had a deeper understanding of plate tectonics than anyone else. You forecast that Japan would suffer through one of the biggest and most destructive earthquakes in history.
In addition to anticipating the quake of March 11, using your geophysicist background you could foretell the resulting tsunami and its impact on the Japanese coast.
As an accomplished nuclear scientist, you understood that many of the nuclear power plants on the Japanese coast were vulnerable to tsunamis and predicted the partial meltdown and radioactive releases resulting in the prolonged evacuation of thousands of people.
If you knew that the United States and NATO allies would be shooting down planes over Libya, the country with the world’s third largest economy would be in humanitarian and financial crisis, and Europe would continue to struggle with the threat of sovereign default, what changes would you have made to your portfolio with this omniscience?
You probably would have sold all of your equities and scurried into Treasury bonds or similarly secure investments.
Let’s reintroduce the Laid Back Portfolio from January. The Laid Back investor has no particular insight into future geopolitical or geophysical events.
He’s more likely to be caught watching “Dancing with the Stars” or “Lost” reruns than tracking Twitter feeds on Yemeni riots. He didn’t predict these events, he doesn’t understand their financial implications, and has not made any changes in the portfolio in the last quarter.
The Laid Back Portfolio is invested 60 percent in the S&P 500, comprised of the stocks of the largest companies in the country, and 40 percent in the BarCap U.S. Aggregate Bond Index, which reflects the entire U.S. bond market.
Because you can’t invest directly in an index, built into the Laid Back Portfolio is a 1 percent annual fee — certainly thriftier than the average A share, but not the lowest fees in the business.
While the oracle was sitting on cash, the Laid Back investor was up 3.5 percent in the first quarter after fees. While not a spectacular return because of the significant portion devoted to bonds, if Laid Back were to continue this pace it would exceed a 14 percent return for the year.
The Laid Back investor is not concerned with rapid rebalancing, buying on the dips, or any other reactive measures. He’ll rebalance the portfolio at the end of the year. While the Laid Back Portfolio will have poorly performing quarters in the future, over time it will be a good benchmark for your own portfolio assuming you are taking a similar level of risk.
We’ll check back in with the Laid Back Portfolio in July.
Taxing deadlines. Only a few days remain before your tax returns are due. Remember to make your Roth and Traditional IRA contributions for 2010 by next Monday — April 18.
Self-employed people with a 401(k) plan can make contributions until April 18th or the date of the extended return. The same deadlines apply to establish and contribute to a SEP-IRA that allows business owners to put away 20 percent or more of 2010 income.
Dave Gardner, for the Daily Camera.