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.
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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.
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 1994, here’s the Coffeehouse Portfolio’s performance vs. an S&P 500 index fund and its 60/40 benchmark:
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.
Let’s touch on why the Coffeehouse lagged its 60/40 benchmark over this period. First, the market beat REITs over the backtested time period, and REITs don’t appear to provide much of a diversification benefit anyway. Secondly, the Size and Value factor premia have both suffered greatly over much of the backtested period. Also, international stocks have lagged the U.S. for about a decade.
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.”
Disclosures: I am long VOO in my own portfolio.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.