7 Simple DIY Portfolios For The “Lazy” Investor

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When in your life will you be rewarded for being lazy?  It turns out in the investing world!  The following portfolios below have been dubbed “lazy” portfolios but their returns are hardly lazy.  Lazy portfolio’s are a type of passive investment strategy and they are a simple, low maintenance way to invest and get your fair share of market returns.  As a bonus, lazy portfolio’s actually tend to outperform similar portfolio’s of actively managed funds over a long-term period.  So what is a lazy portfolio?  Lazy portfolios are just a broadly diversified portfolio of only a few funds constructed with low-cost, no load index funds or exchange-traded funds (ETFs) like those found at Vanguard, though you can find similar ones at other brokerage companies too.  Unlike complex portfolio’s of 15 or more funds and/or individuals stocks and bonds which need to be monitored frequently and where rebalancing is a headache inducing endeavour, there isn’t much for you the investor to do with a lazy portfolio except the occasional yearly rebalance and even more occasional re-evaluation of your target asset allocation as you get older.  The exception I have on my list below is the 1 fund portfolio which is either 100% Vanguard LifeStrategy or Vanguard Retirement Funds.  These are balanced funds and are actively managed.  Still it doesn’t get any simpler than a 1-fund portfolio and if you pick them from Vanguard, they are still very cost-effective.

Before beginning, remember to figure out your asset allocation first.  Some advisors, including Vanguard believe determining your target asset allocation is the single most important decision to make when constructing your portfolio.  You can read my post overview on portfolio construction to get a general idea on how to determine asset allocation.  It’s as easy as taking an online questionnaire or preferably three.

1 fund portfolio: 100% Vanguard LifeStrategy Fund or Target Retirement Fund.  Vanguard LifeStrategy Funds average expense ratio is 0.16% compared to industry average expense ratio for comparable life-cycle funds which are 0.77% and Vanguard Target Retirement Funds average expense ratio is 0.13% compared to industry average expense ratio for comparable target-date funds which are 0.43% (taken from the Vanguard Group website).  Considering most actively managed funds have expense ratios of around 1%, you can see these funds are a bargain.  Mike Piper, a CPA, finance author and blogger of Oblivious Investor actually chooses to invest in Vanguard LifeStrategy Growth Fund for himself and his wife.  He explains why here in this post.  Choosing one of these funds is probably the ultimate lazy portfolio and is the simplest way to invest if you don’t want to have to worry about constructing a portfolio and rebalancing it.  It’s in essence the convenience of having a portfolio manager without the high cost.  But for those who might prefer to construct their own portfolio and have more control over their investments in hopes of slightly higher returns, let’s continue on to some other lazy portfolios below.

2 fund portfolio: 40% Total Bond Market + 60% Total World Stock Market.

3 fund portfolio:  1/3 Total Bond Market (or TIPS) + 1/3 Total US Stock Market + 1/3 Total International Stock Market.  A fan favorite among Bogleheads, devout followers of Jack Bogle, founder of Vanguard, a 3 fund portfolio is probably a great starter portfolio for a novice investor who wants a little more control than just a lifecycle fund or target date fund.  If you purchase Vanguard Admiral Shares only, the total expense ratio can be as low as approximately 0.08%! In a study conducted by Rick Ferri cited here in this WSJ article, a 3-fund lazy portfolio managed to beat their active counterparts up to 80% of the time in the last 16 years.  “A portfolio composed of three such funds from Vanguard Group—40% in the Vanguard Total Stock Market Index Fund(VTSMX), 20% in the Vanguard Total International Stock Index Fund(VGTSX) and 40% in the Vanguard Total Bond Market Index Fund (VBMFX)—beat 5,000 variations of similarly composed portfolios of actively managed funds more than 80% of the time over a 16-year period (1997-2012).”  That’s a pretty big endorsement for the 3 fund portfolio, don’t you think?

4 fund portfolios: I listed two 4-fund portfolios in here since arguably the 3-fund and 4-fund portfolios might be the most popular of the lazy portfolios.  Also there’s no good lazy 5 fund portfolio I could find.  =)  I’d also like to mention here that in Burton Malkiel‘s book A Random Walk Down Wall Street, he talks about how diversification helps mitigate some of the risk in investing.  An important aspect of diversification is to pick areas that are to some extent uncorrelated to one another meaning if one area does well, the other area might not do as well.  For example he cites both foreign stocks and real estate investment trusts (REITS) which allow you to invest in commerical real estate as somewhat uncorrelated to the US stock market.  I personally agree with his points and as such a weakness I see with the 2 and 3 fund portfolios above is that they don’t have a REIT component which might help your portfolio not only increase its returns but also lower its overall risk.  Note, Rick Ferri’s Core Four does have a REIT component, but not William Bernstein’s No Brainer.

No Brainer Portfolio by William Bernstein

Total Bond Market 25%
S&P 500 25%
European Markets 25%
Small Cap 25%

Core Four by Rick Ferri  

Total Stock Market 48%
Total International 24%
Total Bond Market 20%
REIT 8%

6 fund portfolio: Yale portfolio by David Swensen

Total Stock Market 30%
International Developed Market 15%
Emerging Markets 10%
Real Estate 15%
US Treasury Bonds 15%
TIPS 15%

7 fund portfolio: Coffeehouse portfolio by Bill Schultheis

Large Blend 10%
Large Value 10%
Small Blend 10%
Small Value 10%
Total International 10%
REIT 10%
Intermediate Term Bond Index 40%

Remember to rebalance periodically (except the 1 fund portfolios which are actively managed and rebalanced for you).  You could also tweak and customize any of these portfolio’s to match your needs and target asset allocation.

There are many, many more portfolio’s out there in the vast investment world as I’m sure you can imagine but these are simple and low maintenance ones that can work for the novice and for the sophisticated investors alike.

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