The "No-Brainer" portfolio - a stupid idea?
- Noel Watson
- May 5
- 6 min read
Updated: 4 days ago
Introduction
As the name may suggest, a "No-Brainer" portfolio (NBP) is a straightforward portfolio comprising a few asset classes implemented using low-cost index funds. The term was first coined by investing legend William Bernstein in his book The Intelligent Asset Allocator. Bernstein proposed a four-fund NBP.
25% Short-term Bonds
25% of International Stocks (Bernstein is based in the U.S.)
25% Small-Cap Stocks
25% Large-Cap Stocks
In this blog, we will examine this approach from a U.K. perspective and evaluate its historical performance compared to alternative solutions.
U.K. analysis
Abraham Okusanya (creator of the retirement planning tool Timeline) constructed a U.K. implementation of the NBP and published the results. For his 2017 analysis, he took a mix of global equities and bonds, applied a fee of 0.5%pa, and rebalanced annually. He created portfolios with differing ratios of global equities and bonds to cater to varying risk appetites. Risk and return are broadly linked (see #5 of our investing beliefs), and the chart below shows this, with the lines of the NBP (and other offerings) sloping from the bottom left to the top right as returns and corresponding risk (measured in terms of volatility) increase.
The chart also shows how the NBP fares against other multi-asset offerings, and Abraham was his usual straight-talking self in the report.
"A key conclusion of the report is that the vast majority of multi-asset fund managers deliver worse risk-adjusted returns than a simple market portfolio. And they charge clients very high fees for the privilege.
To put it bluntly, it’s daylight robbery! Sadly, just like the Window Tax, it’s entirely legal. Strangely, the tax remained in place for more than 150 years and was only abolished in 1851! If that record is anything to go by, multi-asset fund managers are probably rubbing their hands with glee!"
Portfolio construction
We will now construct a range of portfolios similar to Abraham's and see how these compare to various benchmarks often used by wealth managers and Discretionary Fund Managers (DFMs) to compare performance.
Global Equities: We will use an index fund based on the FTSE Global All Cap Index. This index includes around 9,000 stocks, from small to large cap, covering developed and emerging markets.
Global bonds: An index fund tracking the Bloomberg Global Aggregate Index will represent bonds. This index contains over 14,000 investment-grade and government bonds worldwide.
The NBP portfolios will be rebalanced quarterly, and comparisons will be made over eight years (the longest period for which we have data for the equity index fund) to the end of April 2025 on a total return basis.
Comparison One: Asset Risk Consultants (ARC)
The ARC PCI Indices gather returns from over 100 Wealth Managers, allowing you to compare risk-adjusted performance. ARC offer four categories with differing risk levels. These risk bands are comparatively wide, but we can compare the ARC results on a risk-adjusted basis to the NBP portfolios.
The NPB portfolios (red) contain:
50% equity
60% equity
70% equity
80% equity
We have excluded the ARC Cautious Index from the comparison because its equity content is too low for our comparison.
The difference in returns is eye-opening. All the NBP portfolios have generated greater returns than the ARC benchmarks, with NBP 80 returning not far short of double ARC Equity Risk (76% vs 40%) despite taking slightly less risk.
Another way of measuring risk is to look at the maximum drawdown (how far the portfolio fell from peak to trough). We'd argue that maximum drawdown is a far more important measure than volatility, as it can cause an investor to capitulate and sell their holdings.
Below, we can see that NBP 80 didn't fall as far as ARC Equity Risk during COVID.
Comparison Two: Vanguard LifeStrategy
The Vanguard LifeStrategy (LS) range was launched in 2011. Below, we compare LS 60%, 80%, and 100% equity to NBP 50% to NBP 100% equity (in 10% increments). As with Abraham's analysis above, the LS range has underperformed NBP at the lower equity content levels. But it's performed far better than ARC!
Comparison Three: FTSE 100
The FTSE 100 has endured a challenging time in recent years (and is, therefore, a firm favourite for some firms to benchmark against!). It returned around 60% vs. 97% for the NBP 100 portfolio while taking slightly higher levels of risk.
Comparison Four: AFI indices
The AFI indices are designed as benchmarks for comparing fund performance. They contain funds selected by "leading financial advice firms." It's fair to say their fund selections haven't been leading the way from a performance point of view!
The Also Rans
We've seen how the NBP portfolios compared to the various benchmarks. How do they compare to each other? ARC (blue) and AFI (red) are closely aligned but trail LifeStrategy (green) by a fair margin, with the FTSE 100 (orange) broadly falling in line with the former two on a risk-adjusted basis.
Caveats
There are a couple of caveats to the above analysis:
Some contributors to ARC include more than just investment costs (e.g. adviser and platform), which will drag on their performance. The NBP is net of just fund costs.
The usual disclaimer, past performance is not a reliable indicator of future performance, most certainly applies here.
Criticisms of the NBP
No investing solution is perfect, and over the years, I have seen many comment that the NBP has benefitted from favourable tailwinds for equities and bonds. That has certainly not been the case for bonds in recent years, and it's always worth bearing in mind that asset classes can go through long periods of relative outperformance (and underperformance).
It's also worth mentioning that the NBP does not utilise "factor tilts" in the equity part of the portfolio and might be more susceptible to the overall equity markets falling if we have a rerun of the dot-com bubble. In our article on investing for the long term, we looked at the subsequent lost decade.
Conclusion
As we've pointed out, we believe that Investment Management is commoditised and that most investors will be best served by keeping costs low and investing in globally diversified portfolios consisting of equities and bonds. The NBP is living proof that this approach has worked over the last eight years.
It can be very easy for someone selling you an investment service to give the impression of market-beating performance. The reality is that the investment markets are brutally competitive, and you are extraordinarily unlikely to have access to someone with an edge. If someone shows you evidence of outperformance vs one of the four benchmarks above, we suggest you insist that the "No Brainer" also be included in the comparison (and ensure they show risk-adjusted returns and maximum drawdowns).
If they have outperformed the NBP portfolios on that basis, please send the evidence through to us!
Next steps
If you want to learn more about building a robust retirement plan using an evidence-based investment approach, please contact us.
About us
The team at Pyrford Financial Planning are highly qualified Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide pension advice, investment advice and inheritance tax advice.
Our office telephone number is 01932 645150.
Our address is No 5 The Heights Weybridge KT13 0NY.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Although best efforts are made to ensure all information is accurate, you should not rely on this blog for your personal situation or planning.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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