Using the word “lazy” as an adjective isn’t usually a compliment. Especially when we’re talking about our money, which we’d like to think is working hard for us so one day we won’t have to. But the phrase “lazy portfolio” is a thing. And it’s a good thing at that. It takes the “buy and hold” strategy of investing and takes it to the next level. A lazy portfolio is a collection of investments that require very little maintenance, and according to Vanguard, combine the passive investor’s highest virtues: simplicity, frugality and humility. Simplicity in that a lazy portfolio is usually made up of a few index funds that will mirror the marker. Frugality because these funds should be low cost funds, such a no load funds. And humility because statistics have shown that those who accept that they can’t beat the market will perform better than those who believe they can.
So how does one build a lazy portfolio, also known as a couch potato portfolio? (Side note: the term couch potato made me chuckle. I haven’t heard that term used since the 80’s….wasn’t the couch potato a distant cousin to the California Raisins? If you’re under 30, you have no idea what I’m talking about.)
Step 1 – Choose Your Funds
This is where the simplicity aspect comes into play. You don’t want to make things complicated with too many funds in your lazy portfolio, but you also don’t want all your eggs in just one basket either. Three funds seem to be a magic number, and I mentioned Vanguard earlier because they believe they have the perfect lazy portfolio. Not to be biased to the other brokers, but I am a big fan of Vanguard for their low cost index funds. Plus having all your funds in one place adds to the simplicity aspect as well. Their recommendation is as follows:
- 40% Vanguard’s Total Stock Market Index Fund
- 30% Vanguard’s Total International Stock Market Index Fund
- 30% Vanguard’s Total Bond Market Index Fund
Step 2 – Set Up Automatic Purchases
Talk about lazy, if you set up future purchases of these funds to be automatic (also known as a systematic investment plan or SIP), not only is that one less thing to worry about, you’re employing dollar cost averaging at the same time. Dollar Cost Averaging, which I did a post on here, means that by buying shares at a fixed amount of money over time, you’re buying more when the price is low and less when the price is high.
Step 3 – Rebalance
Rebalancing your portfolio may sound complicated, but it’s not. It just means that you are realigning your portfolio to have the same percentages you had when you started. And even with a lazy portfolio, it’s a good idea to rebalance once a year. So if you take the Vanguard portfolio mentioned above, each year you would want to buy or sell shares of your 3 funds to restore them to the 40-30-30 balance you originally had. And if you get closer to retirement, and want a more conservative portfolio (say 50% in bonds, 25% in stocks and 25% in international stocks), you should rebalance to that strategy as well.
If even these lazy portfolios sound like too much work for you, you can always go with a Balanced Fund which already has a mix of stocks, bonds and cash. Or you could go with a Target Date Mutual Fund that also has a mix of assets and rebalances the fund for you. Leaving almost no work for you and plenty of couch potato time (with maybe some bonbons thrown in, another 80’s throw back.)
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