“Investing should be dull,” according to Nobel Prize winning economist Paul Samuelson. “Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas”
Are you interested in a market beating approach with less volatility?
Do you want a set it and forget it investment plan?
If you answered yes to any of those questions, then you must check out The Wall Street Journal, Marketwatch.com, Paul B. Farrell’s Lazy Portfolios and more.
5 Rules of a Lazy Investment Portfolio- Tips from “Build Your Own Lazy Portfolio”
These tips give you the “why” behind the Lazy Portfolios.
1. Be content as a singles hitter. Or, put another way, bet on every horse. Just buy the market through market matching index mutual funds.
In a study of 66,400 investors, behavioral finance professors Terry Odean (U.C. Berkley) and Brad Barber (U.C. Davis) found “The more you trade, the less you earn.” Stop looking for the “best trade” or the “big score”.
2. Avoid active trading and market timing. Compound returns will explode your wealth.
If you attempt to market time, you need to be right twice, once when you get into the markets and once when you get out. Are you really smart enough to know the perfect time to buy into the markets and the perfect time to sell? The most successful investors are not active traders.
3. Save at least 10% of your income, so you smooth out your lifetime earnings. If you spend everything while you’re working, you’re relegating a quarter of your life (during retirement) to inadequate funding.
4. Trust compound returns. Time in the markets and compounding returns illustrate the miracle of wealth.
If you bought the first index fund in 1976 for $10,000 and didn’t sell it, then it would be worth $200,000 today, according to “Build Your Own Lazy Portfolio”. Not bad for doing nothing.
What Are Lazy Investment Portfolios?
Paul Farrell describes this “lazy portfolio” approach in his August 18, 2014 Marketwatch article, “Lazy Portfolio’s Grant Peace of Mind to 95 Million Investors”,
“Fifteen years ago we began tracking several successful portfolios that all had some common elements, as you can see on our MarketWatch Lazy Portfolio site. Although developed separately — by Nobel Prize winners and millionaires, portfolio managers and professors, grade-schoolers, professional economists and Main Street investors — they were all saying the same thing about how to invest.
Listen, here’s what we heard them say, follow these 10 guidelines, and your investment stress will drop, you’ll have more time to spend on stuff that’s really important, like family and friends, work you love, your returns will increase, and peace of mind increase. They’re a win-win set of easy-to-live-by secrets.”
Even if you’re a “go getter” and not “lazy”at all, this investment approach is worth a look. In fact, it’s a lot like the one I recommend in my FREE How to Invest and Outperform Most Active Mutual Fund Managers.
Marketwatch Lazy Portfolios
There are 8 Portfolios in the Marketwatch lazy portfolio list with each one owned index funds in a variety of proportions. The number of holdings ranges from two to ll.
The 8 Marketwatch lazy portfolios are:
- Aronson Family Taxable
- Dr. Bernstein’s No Brainer
- Dr. Bernstein’s Smart Money
- Fundadvice Ultimate Buy & Hold
- Second Grader’s Starter
- Yale U’s Unconventional
Now, these aren’t the only lazy portfolios available, there are an unlimited number of lazy portfolios. In fact, you might consider the entire robo-advisor revolution the epitomy of lazy portfolios.
Since this original article was written, the Marketwatch Lazy Portolio’s online page has stopped updating returns and portfolio information. So, we’ll use the concept as a jumping off point to give you our own culled list of lazy portfolios from which to choose.
Check out the following set-it-and-forget it list of lazy portfolios from across the web. For this article, we’re going to stick with lazy portfolios with fewer funds. A few are from the original Farrell list and we’ve added several others.
Dr. Bill Bernstein’s No-Brainer Portfolio
Dr. Bill Bernstein is an investment legend, trained as an MD, I was introduced to him through The intelligent Asset Allocator book. He’s conducted a lot of investment research and champions the passive investment approach.
I just revisited my well-worn copy of The Intelligent Asset Allocator and found Bernstein’s three-step approach to asset allocation. Ask yourself these three questions to get started with your portfolio creation:
- How many different asset classes do I want to own?
- How “conventional” a portfolio do I want?
- How much risk do I want to take?
Here’s Bernstein’s simplest lazy portfolio with only four funds. In the book, he doesn’t recommend specific funds, but simply asset classes. Since there are so many index fund ETFs you can choose from your preferrred fund family.
Bernstein’s lazy portfolio asset classes:
- U.S. large cap stocks (S&P 500 fund)
- US small cap stocks (Russell 2000 fund or other small cap choice)
- Foreign stocks (choose a broadly diversified fund with both developed and emerging market companies)
- U.S. short-term bonds
Your asset allocation will depend upon your risk tolerance, with the more aggressive investors dedicating a greater percentage to the stock categories and smaller percentages to the bond allocation.
This portfolio is appropriate for more aggressive investors seeking to profit from the historical small stock outperformance.
Paul Merriman’s Two Funds for Life
Merriman is at the forefront of lazy portfolio construction and founded the original Fundadvice Ultimate Buy & Hold choice. But after much research and testing, he and his collaborator Chris Pedersen have evolved.
Although they still offer variations of the ultimate buy and hold portfolio for conservative to aggressive investors, I’m most excited by their elegant two-funds for life strategy. Merriman told me that this strategy was inspired by John Bogle, founder of Vanguard Investments.
- Target Date Fund – offered by various fund managers
- Small Cap Value Fund – Avantis US Small Cap Value ETF (AVUV)
The percentages in each depend upon your risk tolerance and retirement date.
The laziest investors might select this approach:
|Risk Tolerance||Target Date Fund|
|Small Cap Value |
This portfolio is best for the set-it-and-forget-it investor who wants the opportunity to outperform a typical diversified target date fund portfolio.
2nd Grader’s Starter Portfolio
This 2nd graders starter portfolio is very aggressive, and also easy to manage.
Consisting of only 3 ETFs, you can stick with Vanguard funds or select other fund families.
The asset allocation is:
- 90% Stocks
- 10% Fixed income/bonds
|Percent||Ticker||Exchange Traded Fund||Category|
|60%||VTI||Vanguard Total Stock Market||U.S. Stock Market|
|30%||VEU||Vanguard FTSE All-World ex-US||Global ex-US|
|10%||BND||Vanguard Total Bond Market||US bond fund|
This portfolio is best for the younger, aggressive investor who wants a diversified portfolio with easy maintenance.
Rick Ferri’s Core-4
Ferri is a financial analyst , author, and an investment advser. On his website, Ferri wrote,
I began developing the Core-4® portfolio concept in 2007 when I had the epiphany that simple investing is better investing. I’m convinced most investors will earn higher returns by using simple portfolios rather than complex strategies. Owning a few good funds for the long-term is easier to implement and maintain, has a lower cost and fewer taxes, and in my view leads to higher returns than complicated strategies that involve many securities, higher turnover, and greater cost.Rick Ferri
Ferri offers a list of diversified thematic-based lazy portfolios that span various strategies including:
- Classic allocations
- Total economy
- Global markets
- Income seeker
- ESG (Socially responsible)
For a bit of diversity, let’s take a look at the Income Seeker choice for moderate growth:
|42%||DVY||iShares Select Div||High Dividend Yield US Stock|
|18%||PID||Invesco International Dividend Achievers||High Dividend Yield International Stock|
|10%||PFF||iShares US Preferred Stock||US Perferred Stock Fund|
|30%||VCIT||Vanguard Intermediate-term Corp Bond||US Investment Grade Corporate Bond|
These are suggested funds, but any similar index mutual fund or ETF is appropriate.
Rick is a personal friend, and when I asked him if he followed this investment approach, to my surprise he responded, “Yes”.
This portfolio is ideal for income-seeking retirees who are comfortable with a bit of risk.
The Returns of the Lazy Portfolio’s
Asset allocation determines 90% of one’s investment returns. The 1986 article, “Determinants of Portfolio Performance,” by Brinson, Hood, and Beebower found that the percent of your assets devoted to various asset classes has more impact on your ultimate investment returns than the individual investments within each asset class.
Asset allocation between stocks and bonds explains (a lot) about returns.
Since the market trough and recession in 2008, stocks have enjoyed a tremendous bull run with higher than average returns. Expect that portfolios with the greatest allocation to equities will have the highest returns.
The returns of each of these portfolios will align with the performance of the percentages invested in the index funds. The reason for diversification is to balance the risk with reward. A diversified portfolio will temper volatility so that when stocks tank, you’ll have fixed assets to buoy up returns.
Diversified portfolios will never reflect the highest or the lowest performance.
Lazy Portfolio Wrap up
In general, portfolios of unmanaged index funds will perform better than higher fee actively managed funds.
The allocation percentages between stock and bond (or fixed) asset classes is more likely to determine returns than the number of funds within an investment portfolio.
Returns will vary over time for each of the Lazy Portfolio’s (as well as your own investment portfolio) depending on market conditions.
Use the Marketwatch Lazy Portfolios as inspiration to invest in your own passive index fund, for a simple, effective investment approach.