Making the decision to get involved in the stock market is a tough one for many. While everyone knows that investing sets the stage for future financial freedom, there are several parts of the process that rub people the wrong way.
With a 9-to-5 job and a family, it’s hard to find the time to manage a portfolio, let alone the time it takes to research and choose strong individual stocks to buy. With so many choices out there, the entire process seems paralyzing.
There’s another way to go about investing.
There’s been a recent rise in lazy portfolio investing, which, as its name suggests, requires little time and effort. These portfolios are built for the investor who wants to create meaningful gains, but doesn’t have the time to hover over stock charts every day.
What Is a Lazy Portfolio?
Lazy portfolios are investment portfolios that follow minimalistic investment strategies designed to give you plenty of time to enjoy your life while generating real wealth in the market. The concept uses the passive investing approach whereby investors don’t actively choose, research, and invest in individual stocks.
Instead, lazy portfolios participate in low-cost exchange-traded funds (ETFs), index funds, and mutual funds, which employ professional fund managers to invest into a diversified group of equities based on the fund’s prospectus.
Portfolios in the lazy category are centered around diversifying across different investment-grade funds that give you access to the market at large without requiring you to pick each individual holding.
The Investment Thesis Behind Lazy Portfolios
The lazy portfolio investing strategy is based on a few key factors:
Never put all your eggs in one basket or all your money in one investment. Following the lazy strategy, your portfolio will be heavily diversified, because investment-grade funds are, by their nature, built on diversification.
This is a major source of protection against the day-to-day volatility seen in the stock market. If a stock or stocks across an entire sector falter, your portfolio will easily withstand the blow because the declines will be offset by gains in other assets. This is why most financial advisors suggest investors buy into highly diversified portfolios.
Access to Any Long-Term Strategy
Long-term investors use a wide range of investment strategies to build wealth over time. Some of the most popular are growth, value, and income investing. Lazy portfolios can be built around any of these strategies because there are a multitude of investment-grade funds designed around them.
By doing no more than focusing your allocation on a group of funds that practice your chosen investing style, you can gain relatively safe access to the market following strategies you’re comfortable with.
Easily Adjusted for Risk Tolerance
As part of their makeup, lazy portfolios are incredibly easy to adjust to fit your needs, whether you’re interested in taking on more risk in an attempt to produce market-leading gains, or want lower risk with slow and steady returns.
Pros & Cons of Lazy Portfolios
As is the case with any investment strategy, following a “lazy” strategy will come with its fair share of ups and downs. Some of the most significant pros and cons to consider before diving into this style of investing include:
Lazy Portfolio Pros
Portfolios in the lazy category are some of the most popular on the market today, and for good reason. As human beings, we naturally want to create the biggest value with the smallest effort, and these portfolios are designed to do just that.
According to Bloomberg, more than half of the market’s wealth is held in passive investment vehicles.
So, what’s all the hype about?
Humans have invented ways to heat and cool our homes, make machines do the work, and move at hundreds of miles per hour without breaking a sweat. We’re not lazy, we’re smart — but in some ways, being smart gives us the ability to be, well, lazy.
A key feature of lazy investing is the reliance on simple portfolios. These easy-to-understand portfolios are a way for people to take advantage of the wealth-building power of the stock market without taking months or years of courses or trial-and-error to learn how to navigate successfully.
Simply put, people like simple things. Lazy portfolios are about as simple as investing gets.
These portfolios were created to not only provide easy access to the wealth-building power of the stock market, they were also designed to protect the investors that take advantage of them. That protection comes in two forms:
- Asset Allocation. Lazy portfolios are designed to have a balanced asset allocation. The best of these portfolios invest at least a meaningful percentage of the total portfolio’s value in fixed-income securities or other safe-haven assets. This safety allocation helps to lighten the blow of drawdowns when things aren’t going right for the market.
- Diversification. Diversification acts as an insurance policy, using gains from strong performing stocks to offset declines in any underperforming stock or group of stocks.
3. Meaningful Returns
Oftentimes, investors are told that if they invest through investment-grade funds, there’s no way they can beat the market. That’s because the overwhelming majority of people believe that these funds cover the entire market, and you can’t beat the market if you are the market.
Sure, there are total market funds that do make an attempt to match your returns to market averages as closely as possible, but those aren’t the only funds available.
Plenty of funds focus on growth stocks, value stocks, small-cap stocks, and a wide range of other classes of stock. By choosing the funds you decide to invest in wisely, you’ll be able to expose your portfolio to risk premium factors that have the potential to greatly expand your earnings potential.
Moreover, even the safest of these portfolios — those that are so diversified that you mirror the entire market, generate meaningful long-term average returns that can lead to a very comfortable retirement.
Lazy Portfolio Cons
Sure, lazy portfolios seem to glisten in the sun at first glance, but there are some clouds in the sky that should be considered before you dive in. Here are the most significant drawbacks associated with this style of investing:
1. You Give Up Control
There’s peace of mind in knowing that you have complete control over your money at all times. But when investing using a lazy portfolio strategy, you’re giving over that control to a fund manager who will decide how your money is invested by choosing all your individual investments and the amount of money that goes into each for you.
You control which funds to invest in, of course, but once you buy into a fund, you have absolutely no say in where your money goes.
Moreover, when you invest in an individual stock, you’re buying a small piece of an underlying company. Your shares don’t just come with monetary value — they also come with voting rights.
If an acquisition has been proposed, the board of directors wants to replace the CEO, or management wants to give themselves a raise, chances are there will be a shareholder vote that decides what will happen.
When investing in a fund, your votes will be made by the fund manager, meaning you won’t have any say in the actions of the companies you own small pieces of.
2. Limited Returns
Sure, it is possible to focus your investments on funds with a strong track record of performance that invest in stocks that pay risk premiums, but your returns will be limited to what the fund can accomplish with its diversified portfolio.
Some experts argue that heavy diversification could be a mistake. Even famous investor Warren Buffett was once quoted as saying, ”Diversification is protection against ignorance. It makes very little sense for those who know what they’re doing.”
While most financial advisors and investment advisors disagree, there’s no denying the big difference in the long-term returns of funds that invested in Amazon among hundreds of other stocks and those of individual investors who bought Amazon shares and held as they grew by many multiples.
Ultimately, even though diversification is a source of protection, that protection comes at an opportunity cost.
3. Less Work Doesn’t Mean No Work
Lazy portfolios are meant to be a simple way to access the market, but simplicity doesn’t mean there’s no work involved. Some investors hear the term lazy portfolio, invest in the first one they find, and never think to look over their investments from time to time.
That’s a huge mistake.
Like any other investment, some prebuilt portfolios are better than others. Moreover, as time passes, virtually all portfolios will fall out of balance as some asset prices change faster or slower than others. Regular maintenance, at least on a quarterly basis, is a must.
There’s no such thing as a set-it-and-forget-it investment vehicle. Even the laziest of the lazy options will require some upkeep every now and then.
How to Build a Lazy Portfolio
The most work you’ll do when following a lazy portfolio strategy is to set it up. However, building a lazy portfolio is relatively simple. Here’s how to do it step by step:
1. Start by Assessing Your Goals
The first thing you’ll want to do is assess your goals. Are you planning on building a retirement fund over the next 30 years, setting up a college fund that will grow over the next 18 years, or hoping to put a down payment on a house in the next five years?
Your time horizon will play a crucial role in your asset allocation and the types of funds you’ll invest in overall. After all, short-term investments are often very different from long-term investments.
Figure out what your goals are before you invest your first dollar.
2. Think About Asset Allocation
Next, it’s time to think about allocation, both in terms of the percentage you want to invest in various asset classes and how much you’ll invest in different assets within each category. You’ll want to start at the top level and work your way down to the details.
If you’re not sure how much money you want to invest in fixed-income assets and how much in equities, a good rule of thumb is to use your age for your bond allocation. For example, if you’re 40 years old, you might invest 40% of your investments in bonds, with the remaining 60% in equities.
As you age and your time horizon shrinks, larger investments in safe assets will keep your returns more stable and drawdowns minimized.
Keep in mind, using your age as your fixed-income allocation is a strategy designed for those with a moderate risk tolerance. Investors with a higher risk tolerance may want to dial back fixed-income investments to leave more room for equities, and those with a lower tolerance for risk will want to invest more heavily in bonds and less in equities.
3. Setting Up Your Fixed-Income Allocation
Once you’ve decided what percentage of your portfolio will be invested in safe assets and what percentage will be invested in equities, it’s time to set up allocation in each, starting with the fixed-income side of the equation.
Different Kinds of Safe-Haven Investments
First, you’ll want to know what types of safe-haven instruments are available to you. Some of the most popular funds focus on the following options:
- Corporate Bonds. Corporate bonds are debt issued to corporations by investors. As with personal debts, corporate bonds pay interest rates, known as coupon rates, offering up predictable income.
- Municipal Bonds. Municipal bonds work just like corporate bonds, but are offered by government municipalities, often to cover public projects or balance the books.
- Treasury Bonds. Treasury bonds, also commonly called government bonds, are bonds backed by the full faith and credit of the United States government. These are the safest bond options but also come with the lowest returns.
- Other Treasury Debt Securities. The U.S. Treasury offers a wide variety of debt securities, ranging from bonds to Treasury inflation-protected securities (TIPS), Treasury bills (T-bills), and Treasury notes. There are funds centered around each of these asset types as well as a mix of them.
- Precious Metals. Precious metals have long been considered to be safe-haven investments, and there are plenty of funds centered around investments in both physical precious metals and the mining companies that produce them.
It’s also important to keep in mind that maturity dates play a major role in returns of fixed-income investments. The shorter the maturity, the lower the return, while longer maturities offer higher returns, creating yet another area where risk tolerance and time horizon come into play.
Diversify Your Fixed-Income Investments
Now that you know about the different types of safe assets that are available to you, you’ll want to diversify your holdings in them. For example, if you’ve decided to invest 40% of your portfolio into safe havens, you’re not going to want that entire 40% allocation invested in one fund.
Instead, diversify your holdings by investing one-third of your fixed-income allocation in each of your three favorite safe-haven vehicles.
Popular Fixed-Income Funds
Some of the most popular safe-haven funds include:
- Vanguard Total Bond Market Index Fund ETF (BND). The BND fund invests in a diversified group of U.S. bonds with the exclusion of inflation-protected securities and tax-exempt bonds. With more than $312 billion under management, it’s one of the largest bond funds on the market today.
- Fidelity U.S. Bond Index Fund (FXNAX). FXNAX is another total U.S. bond index, investing in a wide variety of diversified U.S. dollar denominated bonds. The fund has attracted more than $58 billion in investments.
- iShares 1-3 Year Treasury Bond ETF (SHY). The SHY fund invests in a range of short-term Treasury bonds with maturity dates ranging from one to three years. The fund has attracted more than $19 billion in assets.
- SPDR Gold Shares (GLD). Finally, the GLD fund is the largest ETF on the market that invests in physical gold. The fund has attracted more than $59 billion in investments from the community.
4. Setting Up Your Equity Allocation
Now that you’ve got your safe-haven assets under control, it’s time to consider how you’ll go about your equity investments. Before you decide which funds to invest in, and what percentage of your portfolio will be invested in each fund, you’ll want to think about the following:
Consider Risk Premium Factors
Because the stock market generates meaningful returns on average, there’s no shame in investing in funds that offer diversified exposure to the entire market. But you’re not going to beat the market if you do so.
You can, however, use a lazy strategy as a means to produce market-leading returns by focusing your investments on risk premium factors. Risk premiums give you a faster expected rate of return in exchange for your willingness to accept moderately increased risk.
For example, value stocks have outperformed growth stocks on average throughout history, even though value stocks are sometimes undervalued for painful reasons and growth stocks have the potential to skyrocket. Similarly, small-cap stocks have historically outperformed their large-cap counterparts over the long term on average, even though smaller companies may hit more rough patches than larger, more seasoned companies.
As a result, many “lazy” investors look for investment-grade funds that focus their efforts on small-cap value stocks, which are stocks representing smaller companies that are undervalued relative to other companies of their size within their industry. These stocks tend to be more volatile but often outperform the market average when aggregated over a long time horizon.
Think About How Lazy You Want to Be
It’s also important to think about just how lazy you want to be when making your investments. While the tough day-to-day decision making in these portfolios will be made by the fund managers, you’ll still need to put work in to maintain a healthy portfolio.
The more funds you invest in, the more work you’ll be required to do. While even the most complex of lazy portfolios will require no more than a couple hours a quarter to maintain, by being a minimalist in terms of fund mix, you can reduce that time to about 15 minutes per quarter.
Keep in mind, there is a downside to being a minimalist. If you choose to only invest in one or two equity funds, you’ll want the most highly diversified funds to reduce your overall risk, meaning you’ll be investing in total U.S. equity funds or total international funds.
That doesn’t leave much room for allocation to risk premium-centric funds, meaning that while your returns may track closely to the benchmarks, you’re not likely to beat the market if you’re not willing to add further diversification to the funds in your portfolio.
Consider Your Need for Income
Income isn’t an important factor for many investors, but for some, it’s crucial. Investors who are nearing retirement or already living off their investments need to generate income to make their retirement as comfortable as possible.
If you need your investments to produce income for you, your equity holdings should focus on large-cap U.S. stocks that have a strong historic performance in terms of dividends. There are several funds to choose from that invest in these types of companies.
Think About Real Estate Investments
Real estate is a massive market. Countless investors have become very wealthy as a result of real estate investments, and they’re often a well-performing part of a balanced portfolio.
To keep your investments lazy, you want to steer away from buying properties to flip or renting them out and becoming a landlord. Instead, leave the leg work to the pros on Wall Street by investing in real estate investment trusts (REITs).
These funds work just like ETFs, index funds, and mutual funds. However, instead of investing the money pooled from investors in stocks and bonds, these funds buy and manage various types of rental properties and distribute the proceeds to shareholders.
Consumer-focused REITs may invest in apartment buildings, condos, and houses, while tech-focused REITs might invest in cell towers or data centers. No matter what type of real estate you want a piece of, you can access it through a managed fund.
Popular Equity Funds and REITs
Here’s a list of some of the most popular equity funds and REITs on the market to get you started on the right foot:
Total Stock Market Funds (Domestic & International)
- Vanguard Total Stock Market Index Fund ETF (VTI). VTI is a total U.S. stock market fund that invests in a wide range of small-, mid-, and large-cap companies ranging in sectors and styles. Over the years, the fund has attracted more than $1.25 trillion in assets.
- Vanguard 500 Index Fund ETF (VOO). The S&P 500 index lists the 500 largest publicly traded companies in the United States, and the VOO fund aims to match its performance, giving you diversified exposure to the total U.S. market. The fund has attracted more than $750 billion from investors.
- Vanguard Total International Stock Index Fund ETF (VXUS). The VXUS fund was designed to provide investors diversified exposure to stocks outside of the United States, which represent about half of the global market capitalization.
- Vanguard Growth Index Fund ETF (VUG). The VUG fund invests in large-cap U.S. stocks that come with strong growth characteristics. The fund’s allocation has a heavy tilt toward the technology industry. The fund manages more than $165 billion in assets for its investors.
- iShares S&P 500 Growth ETF (IVW). The IVW fund invests in companies listed on the S&P 500 that display strong growth characteristics. To date, it has attracted more than $32 billion from investors.
- JPMorgan Investor Growth Fund (ONGAX). The ONGAX fund invests in a wide range of stocks around the world, most of which display strong growth characteristics. It has attracted more than $4 billion from investors.
- Vanguard Value Index Fund (VVIAX). The VVIAX fund invests in a diversified group of large-cap U.S. stocks that display value characteristics. The fund has attracted more than $125 billion from the investing community.
- iShares S&P 500 Value ETF (IVE). The IVE fund follows the S&P 500, investing in the stocks listed on the index that come with strong value characteristics. The fund has attracted more than $24 billion from investors.
- Fidelity Value Fund (FDVLX). The FDVLX fund invests in a highly diversified list of stocks that are not only considered to be undervalued, but also have a strong track record in terms of revenue and earnings growth. The fund has attracted more than $9 billion from the investing community.
Small Cap-Centric Funds
- Vanguard Small-Cap Value Index Fund (VSMAX). The VSMAX fund is a great choice because it mixes both small-cap and value risk premiums to provide significant returns. The fund currently manages well over $130 billion in assets.
- Avantis International Small-Cap Value ETF (AVDV). The AVDV fund takes small-cap value to the next level by adding an international spin. Keep in mind, the ex-U.S. market represents about half of the global market cap. This fund allows you to tap into the small-cap value opportunities in this vast sector of the market. The fund manages more than $1 billion in assets for investors.
- iShares Core S&P Small-Cap ETF (IJR). The IJR fund invests in a diversified group of U.S.-based small-cap stocks. The fund’s compelling performance has been the center of attention for investors who’ve piled more than $68 billion into it.
Income Stocks and Dividend Funds
- Vanguard Dividend Appreciation ETF (VIG). The VIG fund invests in stocks listed on the U.S. Dividend Achievers index, which only lists companies that have increased dividends annually over the past 10 years. Investors currently have more than $71 billion invested in the fund.
- SPDR S&P Dividend ETF (SDY). The SDY fund invests in stocks listed on the S&P High Yield Dividend Aristocrats Index, which only lists stocks that have consistently increased their dividends over the past 20 years. Moreover, the fund is weighted by dividend yield, with the highest yielding stocks taking the largest allocations. More than $19 billion in assets are managed by the fund.
- Schwab U.S. Dividend Equity ETF (SCHD). Finally, the SCHD fund tracks the Dow Jones U.S. Dividend 100 Index. This means the fund invests in companies known for generating strong dividend yields selected for fundamental strengths when compared to their peers. The fund manages more than $26 billion in assets for its investors.
- American Tower Corporation (AMT). American Tower Corporation is one of the world’s largest trusts, investing in broadcast communications infrastructure like cell towers in several countries around the world. The trust trades with a market cap of more than $129 billion.
- Crown Castle International (CCI). Crown Castle is another fund focused on communications infrastructure, including cell towers and fiber networks. To date, the fund has attracted more than $80 billion from the investing community.
- Prologis (PLD). Prologis invests in large warehouses that become fulfillment centers. The company has become an integral part of the global supply chain and a massive property manager with more than $97 billion in assets to stand behind.
5. Keep Your Costs Low
One of the most important aspects of choosing the right funds for your lazy portfolio is cost. There’s no such thing as a cost-free investment, and investment-grade funds come with management fees that average about 0.44% per year according to The Wall Street Journal.
However, some funds charge expense ratios that are significantly higher or lower than their peers.
When choosing which funds you’ll add to your portfolio, it’s important to stick with the lowest cost providers possible. After all, your goal is to make money in the market, and high expenses ultimately cut into your profits.
Fund managers known for providing some of the best low-cost index funds on the market today include:
- Vanguard. Vanguard funds come with costs that are significantly lower than those charged by their peers. The average expense ratio across their funds is less than 0.10%.
- iShares. iShares is also known for providing industry leading costs with their funds. The average cost associated with their funds is about 0.31%.
- Fidelity. While Fidelity doesn’t share what their average expense ratio is, looking through their different fund options, you’ll find that most funds provided through the firm come with costs of 0.20% or lower.
Consider a Pre-Built Portfolio
Building your own lazy portfolio is one way to go about investing, but if you want an even simpler approach, you may want to consider investing in one of many pre-built portfolios that take the guesswork out of asset allocation and fund selection.
Some of the most popular lazy portfolios include:
- The Bogleheads 3 Fund Portfolio. The Bogleheads 3-Fund Portfolio is about as lazy as lazy gets, including investments in only three different funds.
- The David Swensen Portfolio. The David Swensen Portfolio, also known as the Yale Model, is a portfolio that was designed to give investors access to a portfolio similar to the one used by Yale University to manage its endowment.
- The Harry Browne Permanent Portfolio. The Harry Browne Permanent Portfolio is an all-weather portfolio designed to perform well regardless of which economic cycle is taking place at the moment.
- The Coffeehouse Portfolio. Developed by personal finance guru Bill Schultheis, the Coffeehouse Portfolio is a very simple-to-follow strategy that’s tilted toward small-cap value opportunities.
- The Paul Merriman Ultimate Buy-and-Hold Portfolio. Inclusive of 13 different funds, the Paul Merriman Ultimate Buy-and-Hold Portfolio is one of the most diversified pre-built lazy portfolios out there.
- Ray Dalio All Weather Portfolio. Finally, the Ray Dalio All Weather Portfolio’s name says it all. The portfolio was designed with carefully chosen assets in mind, ensuring that investors will realize minimal drawdowns in the worst of times and strong growth in the best.
Maintain Balance in Your Portfolio
Regardless of how lazy your lazy portfolio is, there’s no such thing as a set-it-and-forget-it investment option. Each portfolio is designed with carefully thought out asset allocation. Inevitably, some assets in the portfolio will rise and fall at faster rates than others.
As a result, the balance between assets will be thrown off from time to time as growth in some investments outpace others. It’s important to regularly rebalance your portfolio.
Thankfully lazy portfolios are designed to require minimal supervision, so you won’t have to put much work in here. Daily, weekly, or even monthly rebalancing is generally unnecessary. However, you should take the time to rebalance your portfolio on a quarterly basis at a minimum.
All in all, lazy portfolios are quickly becoming the norm among the average retail investor, and for good reason. While there may be some work involved, lazy portfolios offer one of the easiest ways to take advantage of the wealth-building power of Wall Street.
With allocation adjustments to limit risk and expand reward, these portfolios can be customized to fit the needs of almost every investor. At the same time, lazy portfolios keep expenses to a minimum by being focused on low-cost investment-grade funds.
If you decide to go the lazy route, take the time to maintain balance in your portfolio and keep in mind that you should do your research before diving into any investment — even a lazy one.