How to Build the Best Lazy Portfolio
A lazy portfolio is a collection of investments that require very little maintenance. It is considered a passive investing strategy, which makes lazy portfolios best suited for long-term investors with time horizons of more than 10 years. Lazy portfolios can be considered an aspect of a buy and hold investing strategy, which works well for most investors because it reduces the chances of making poor decisions based upon self-defeating emotions, such as fear, greed, and complacency, in response to unexpected, short-term market fluctuations.
Therefore being lazy is a good thing when it comes to investing! The best lazy portfolios can achieve above-average returns while taking below-average risk because of some key features of this simple, "set it and forget it" strategy.
Invest in Index Funds
Index investing strikes at the core wisdom of laziness: Because these mutual funds or Exchange Traded Funds (ETFs) are not actively-managed, their passive nature results in performance that matches the broad market performance of a given index, rather than attempting to "beat the market." In different words, mutual fund managers can be just as susceptible to human emotion, and thus human error, as an amateur investor. Therefore, professionals can make poor investment decisions by engaging in foolish market timing.
Set Up a Systematic Investment Plan (SIP)
What better way to be lazy (and wise) than by making all of your future mutual fund purchases automatic? You can do this by setting up what's called a systematic investment plan, or SIP, with your chosen mutual fund company or brokerage firm. Not only do you remove yourself from the risks of market timing but you take advantage of dollar-cost averaging, which reduces the average share price of investments by purchasing shares at fixed dollar amounts and effectively buys more shares when prices are low and fewer shares when prices are high.
Use No-Load Funds
It should be a no-brainer to use no-load funds for your lazy portfolio. No-load funds are free of sales charges, called loads, which are designed to be a form of payment to stockbrokers and other commission-based financial advisers for their services. When you do things yourself, which is entirely possible with mutual funds, there is no need to pay added fees. Also, keeping costs low will help boost your portfolio returns.
Build a Simple Portfolio of Mutual Funds
A common long-term portfolio structure is the core and satellite portfolio, which is set up just how it sounds. Select a "core," such as one of the best S&P 500 Index funds. This will make up the largest portion of the portfolio. The other funds in the portfolio with each make up a smaller percentage. These are the "satellites." The primary objective of this portfolio design is to reduce risk through diversification (putting your eggs in different baskets) while outperforming (obtaining higher returns than) a standard benchmark for performance, such as the S&P 500 Index.
In summary, a core and satellite portfolio will hopefully achieve above-average returns with below-average risk for the investor.
Rebalance Your Portfolio
Re-balancing a portfolio of mutual funds is simply the act of returning your current investment allocations back to the original investment allocations. Therefore re-balancing will require buying and/or selling shares of some or all of your mutual funds to bring the allocation percentages back into balance. For example, if your lazy portfolio consists of four mutual funds, allocated to 25% each, you would place the appropriate buy and sell trades to return back to these allocations on a preplanned, periodic basis.
In different words, re-balancing is an important maintenance aspect of building a portfolio of mutual funds, just as an oil change or tune-up is to the ongoing maintenance of your car. In some cases, you may be able to set up an "automatic" re-balance. Either way, you should do this once per year. More than this is not really necessary. Just pick a date, such as your birthday or New Year's Day or something memorable and re-balance.
Use One of the Best Lazy Portfolio Examples
A popular lazy portfolio example is a three-fund lazy portfolio with Vanguard funds. There is more than one way to allocate the three funds but here is one way to do it:
- 40% Vanguard Total Stock Market Index Fund
- 30% Vanguard Total International Stock Index Fund
- 30% Vanguard Total Bond Market Index Fund
In this example, the investor can use one mutual fund company, Vanguard Investments, which has a great selection of no-load index funds, while using funds that provide broad diversification across different market capitalization (large-cap, mid-cap, small-cap), worldwide exposure (both US and foreign markets) and broad bond market exposure.
Lazy Portfolio Option: Invest With Just One Mutual Fund
Rather than creating your own lazy portfolio, you can choose the laziest portfolio of all -- the one-fund portfolio! You can use a balanced fund, which will normally have a stated and fixed allocation of stocks, bonds, and cash. For example, many balanced funds have a moderate mix of 60% stocks, 30% bonds, and 10% cash. Others are either more aggressive or more conservative.
Another one-fund option is to use a target-date fund, which are funds that invest for a particular date in time. These funds are common in 401(k) plans and can be used in the one-fund approach. If you are investing for retirement, you may consider one of Vanguard's target retirement funds. For example, someone who plans to retire in or near the year 2030, could use Vanguard Target Retirement 2030 (VTHRX). As the target retirement year draws closer, the fund manager will gradually decrease the stock allocation and increase the bond and cash allocation (evolving from aggressive to moderate to conservative) over time.
Buyer beware: Target-Date Funds are the ultimate "lazy portfolio" but there are no one-size-fits-all funds. For example, an extremely conservative investor may not be comfortable with a target-date fund allocation if the allocation is too aggressive for their particular risk tolerance. Therefore you may want to do a little homework before investing by checking the asset allocation of the target-date fund.
Jacara does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.