Wouldn’t it be nice to have a lazy portfolio? Investing can be intimidating. So many choices for picking stock, and different experts, and differing opinions. What’s Average Joe to do?
Wouldn’t it be nice to get the positive outcomes of investing while dedicating minimal effort and minimal cost? The lazy portfolio is one of the surest ways to reach financial independence without tearing your hair out worrying about your investments.
Yes, it sounds too good to be true. But as Vanguard founder and all-around good guy John Bogle once wrote:
While the interests of the business are served by the aphorism “Don’t just stand there. Do something!”, the interests of investors are served by an approach that is its diametrical opposite: “Don’t do something. Just stand there!” –John Bogle
Huh?! Don’t do something? Just stand there? Yes. This idea is one of the foundational principles behind the lazy portfolio.
The Lazy Portfolio Explained
Lazy portfolios come in various shades, but they all exhibit the same core tenets.
- Lazy portfolios contain a small number of low-cost index funds. This makes them easy to maintain and easy to rebalance.
- Those index funds are diverse, so the fund performs well in many different market conditions.
- Lazy portfolios typically maintain the same asset allocation for long periods of time (e.g., decades). Thus, the portfolio is lazy.
There might be some “terms of art” in there that you’re unfamiliar with. If you’re a true newcomer to investing, check out our basic guide to investing first.
Index funds are simple investing assets that attempt to track an index, e.g., the S&P 500. Thus, an “S&P 500 Index Fund” will hold the stocks currently in the S&P 500. This simple rule—e.g., “just do what the S&P 500 does”—makes index funds easy and cheap to run.
Index funds tend to focus on stocks, bonds, real estate, and commodities (e.g., gold). You won’t find a cryptocurrency index fund (…maybe someday!).
Rebalancing is a practice where an investor buys and sells some assets to realign their portfolio weighting (e.g., 70% + 30% bonds) back to its original weighting. Since lazy portfolios contain only a few funds, this rebalancing exercise is easy.
Diversity, as the name implies, describes owning assets that perform differently from one another. In the section “Real Examples of Lazy Portfolios,” you’ll see some examples of this diversity.
Who Created the Lazy Portfolio?
While it’s hard to pin down the creator of the original lazy portfolio, there are many well-known advocates of lazy portfolios in the investing world.
Perhaps the most well-known disseminators are the so-called Bogleheads. The Bogleheads are a group of investors who follow the wisdom of John Bogle, founder of Vanguard and inventor of the first publically available index funds.
The Bogleheads have a well-known forum where they discuss the finer points of index funds and lazy investing.
Within the Bogleheads community, a few popular names stick out. These folks have written books about lazy investing and frequently have suggested specific lazy portfolio allocations of their own.
We’ll go over their ideas toward the end of the article.
Why the Lazy Portfolio Works
Some of you might be thinking:
How can such an admittedly lazy form of investing keep up with—or even outperform—the experts who are actively making trades on a daily, weekly, monthly basis?
It’s an excellent question, and entire careers have been made on providing sufficient answers.
The key lies in the following assumptions. I’ll list these assumptions out, and then we’ll break them down.
- Successful stock-picking depends on luck more than on skill. Therefore, any sort of repeatable successful stock-picking is scarce.
- Since more stock-picking is just luck, you can reduce your risk by aiming to be average and diversifying across asset classes.
- If you’re choosing a simple, average approach, then one of the few knobs you can turn is to keep fees low.
Assumption #1: Stock-Picking is More Luck Than Skill
Studies from established academics such as Nobel Prize winner Eugene Fama and MIT’s Anette Hosoi have repeatedly concluded that stock-picking is largely governed by luck.
A game of skill tends to see that performance is repeatable over time. Good performers repeat their good performances. Bad performers do the same. Take chess, for example. Chess is a game of skill, as evidenced by the fact that top performers repeat their performances for decades.
But compare chess to coin-flipping. We all know that coin-flipping is pure luck. It makes sense that coin-flipping performances are hard to repeat. Past flips have no correlation to future flips. “Winning” a coin-flipping competition has nothing to do with the competitor themself.
Stock-picking falls somewhere in between these two extremes, but it’s mostly governed by luck. Proponents of the lazy portfolio actually see this as a good thing.
Fama and his co-author Ken French found that fewer than 16% of mutual funds could repeatedly outperform the average stock market by more than 1.25%. Some funds have some skill, but most are simply average.
Hosoi and her team at MIT rated various activities on a scale of zero to one, with zero being pure luck and one being pure skill. Mutual fund performance (a.k.a. professional stock pickers) ranked at 0.32. Some skill, but mostly luck.
Assumption #2: You Can Reduce Risk by Aiming for Average and Diversifying
Question: if you flipped a coin 1000 times, what would the result be?
You could go through and do the flips and discover the answer empirically. Or you could use simple statistics and arrive at the answer: the average result is 500 heads and 500 tails.
We can do the same thing with the investments in our lazy portfolio. You can pay someone to pick stocks for you. This is like going through all of the coin-flipping. Or you can jump ahead to the known result: on average, your investments are going to perform at the same level as the rest of the market.
Don’t look for the needle in the haystack. Just buy the haystack!
If the stock market goes up 15% in a year, then the average stock investor saw their portfolio go up 15%. Some went up more and some less. But on average, the return was 15%.
With a lazy portfolio, you can choose investments that intentionally behave like the market-on-average. These investments are the aforementioned index funds.
This makes your investing future quite dependable. You’ll always get average returns. Never above average, never below average. This is a measure of risk mitigation.
You can go a step further and choose different index funds to invest in. One classic diversification tactic is to choose a stock index fund and a bond index fund. Stocks and bonds tend to perform in uncorrelated manners. E.g., a bad year in stocks won’t sink your portfolio—bonds will keep you afloat.
Harry Markowitz won a Nobel Prize for his work in this area. Namely, Markowitz found that diversification can decrease risk in a portfolio while maintaining the same level of return. Less risk, same reward. That’s a great deal.
Investing in diverse index funds will yield a low-risk, average market return.
Assumption #3: The Average Approach Keeps Fees Low
Using the same example as in the last section, why would we pay somebody to sit there and flip 1000 coins if we can just jump to the correct answer ourselves?
The same idea about fee structure applies to mutual funds and index funds and lazy portfolios.
Index funds are easy. They don’t flip the coins. They just buy the entire index they are tracking and jump straight to the end conclusion—they’ll achieve average results.
This simplicity gets passed to us, the investors, in the form of lower costs. Whereas an actively managed mutual fund might cost you 1%-2% of your portfolio per year in fees, the index funds comprising lazy portfolios typically charge 0.1%…or less!
This difference in fees is massive. Let’s explain with some quick math.
Take two identical funds that average an 8% return per year. One charges 1.5% per year in fees and the other charges 0.1% per year. How will this fee difference play out over 40 years?
The high-fee investor will have 43% of their total wealth eaten by fees. The low-fee investor will have ~4% of their wealth eaten by fees.
The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.
In a $2 million dollar retirement portfolio, that’s the difference between $860,000 in fees vs. $80,000 in fees. That’s years of extra work vs. years of extra retirement. It drastically changes your personal version of the 4% rule.
That Is Why Lazy Portfolios Work
Lazy portfolios work because stock-picking is more luck than skill. We don’t need someone else to execute a complicated investing plan on our behalf. Instead, we can jump ahead to the conclusion: just give us average results!
That’s what index funds do. They provide average returns. And choosing a few different index funds provides diversity to lower our risk.
These index funds keep our costs low. Over the course of decades, these fee differences really add up. The power of compound interest begs you to keep your fees as low as you can.
Real Examples of Lazy Portfolios
Let’s go over a few of the most famous lazy portfolio allocations. Perhaps you’ll see something here that strikes your fancy.
The Two-Fund Portfolio
The two-fund portfolio is by far the simplest lazy portfolio. It’s also the most well-known.
The eponymous two funds are a total stock market index fund and a total bond market index fund. Rick Ferri—a popular Boglehead and CFA—recommends 60% of an investor’s portfolio buy the stock index fund and the remaining 40% go into bonds. Thus, this is called a “60/40 portfolio.”
Since 1970, this 60/40 portfolio has averaged a 6.3% annual inflation-adjusted return.
Legendary investors Warren Buffett and John Bogle have their own variations of two-fund portfolios. Bogle recommended alternatives to Ferri’s total bond market index fund, and Bogle also suggested different allocations (e.g. 80/20).
Buffett, however, recommends an interesting lazy portfolio consisting of a 90% allocation to a total stock market index fund and a 10% allocation to U.S. Treasury bills.
The Three-Fund Portfolio
There are many popular variations of three-fund lazy portfolios. But almost all of them start with a two-fund portfolio and add a third asset class: international stocks.
For example, Rick Ferri’s three-fund portfolio suggestion is 40% U.S. stocks, 40% total bond market, and 20% international stocks. Other pundits suggest a mix of 33.3% each.
But almost all three-fund portfolios maintain exposure to U.S. stocks, international stocks, and bonds.
Ferri’s 40/40/20 portfolio has a 6.0% annual inflation-adjusted return since 1970.
“Higher Order” Lazy Portfolios
As you might have guessed, some experts propose lazy portfolios consisting of four or more individual index funds. If you push this too far, you’ll negate the “lazy” aspect of the portfolio. But the following funds are well-respected in the Boglehead community.
For example, Bill Schultheis’s “Coffeehouse” lazy portfolio contains seven unique index funds. It holds a 40% allocation in bonds and budgets a 10% allocation to each of five different stock funds, plus a final 10% to a real estate investment trust (REIT) index fund.
Since 1970, the “Coffeehouse” portfolio has averaged a 6.5% annual inflation-adjusted return.
William Bernstein, the author of The Four Pillars of Investing and numerous other investing books, recommends the so-called “Coward’s” lazy portfolio. Bernstein recommends nine unique index funds. Extra diversification equals extra safety, according to Bernstein.
Since 1970, the “Coward’s” portfolio has averaged a 6.0% annual inflation-adjusted return.
Note: Jesse’s personal investments follow a 4-fund lazy portfolio outlined here.
There are many ways to be lazy. Who knew?!
Go Be Lazy
When it comes to investing, there’s nothing wrong with being lazy. In fact, it’s ideal!
The lazy portfolio is a hands-off and inexpensive approach to investing. It promises average returns, a diverse asset holding, and very few headaches.
While it doesn’t have the glamor and glitz of terrific stock picks and huge returns, it doesn’t have stock-picking downsides either. Instead, lazy investing promises the highest ratio of success-to-stress in the investing world.
