Understanding How a Lazy Portfolio Works - SmartAsset (2024)

Understanding How a Lazy Portfolio Works - SmartAsset (1)

Want to grow wealth but don’t want to have to spend hours poring over your investment portfolio or investment decisions? If so, a lazy portfolio may be right for you. Lazy portfolios are designed to generate returns without requiring constant maintenance or attention. It’s a 180-turn from active investing and day trading, which are decidedly more hands-on. If you prefer a passive approach to investing or you lean toward a buy-and-hold strategy, then building a lazy portfolio could be a simple way to achieve your financial goals. Finding the kind of portfolio that fits your goals, timeline and risk profile is best done by working with a financial advisor.

What Is a Lazy Portfolio?

A lazy portfolio is a collection of investments that more or less runs on autopilot. Lazy portfolios are designed to weather changing market conditions without requiring investors to make significant changes to their asset allocation or goals. For that reason, they can sometimes be referred to as “couch potato” portfolios.

Having a lazy portfolio doesn’t mean that you don’t care about your investments or that you take a completely laissez-faire attitude toward investing. Instead, it means that you’ve created a portfolio that can continue generating returns, regardless of what the market is doing at any given time.

How a Lazy Portfolio Works

Lazy portfolios are designed to be mostly set-it-and-forget-it. When you build this kind of portfolio, you start by deciding which investments to include. You can then decide how often you want to invest and in what amount. Automating investments monthly, for example, can be a simple way to benefit from dollar-cost averaging over time. This principle smoothes out market highs and lows since you’re continually buying in regardless of price.

You’d still need to rebalance your portfolio routinely to make sure your asset allocation continues to match up with your goals and risk tolerance. Tax-loss harvesting is something you may want to tackle once or twice yearly if you’re investing in a taxable brokerage account. This can help you preserve more of your returns by offsetting capital gains with capital losses.

Lazy portfolios can follow an index investing strategy, which relies on index funds as the centerpiece. With this type of portfolio, the goal is to meet the market and match the performance of the underlying index. That doesn’t mean that a lazy portfolio can’t deliver above-average returns, however. It’s possible that a couch potato portfolio could outperform an active portfolio, depending on which investments you choose and how the market moves.

This kind of approach is better suited for investors who have a longer window in which to invest or those who aren’t interested in active day trading. Lazy portfolios make it possible to reap investment rewards without doing much heavy lifting to get there.

Lazy Portfolio Example

One investor’s lazy portfolio may not look the same as another’s. For example, some lazy investors may rely on just one fund. So you might invest in a target-date fund that’s based on your expected retirement date. Target-date funds adjust their asset allocation automatically over time as they get closer to that date.

Or you might prefer a two-fund or three-fund portfolio instead. Here, you’re investing in two to three funds for total diversification. For example, say you want to create a lazy three-fund portfolio using Vanguard funds. Here’s what your portfolio might look like:

  • 50% Vanguard Total Stock Market Index Fund (VTSAX)
  • 20% Vanguard Total International Stock Index Fund (VTIAX)
  • 30% Vanguard Total Bond Market Index Fund (VBTLX)

You could do the same with Fidelity index funds or index funds from Schwab. And you can adjust the asset allocation for each fund, based on your age, risk tolerance and goals. So if you’re younger, for example, you might shift 80% or 90% of your portfolio to stocks and just 10% to bonds.

By choosing index funds that offer exposure to domestic stocks, international stocks and bonds you can get complete diversification. The only thing you might have to change over time is your asset allocation as you get closer to retirement.

Pros and Cons of Lazy Portfolios

Lazy portfolios can offer simplicity for investors who want to build wealth but don’t want to have to constantly monitor their investments. It’s fairly easy to set up a lazy portfolio with a brokerage account or even inside your 401(k) or IRA. Index funds can offer consistent returns over time and they may carry lower expense ratios compared to actively managed funds. So overall, lazy portfolios can be less of a hassle for investors and less expensive to maintain.

The risk, of course, is that a lazy portfolio will underperform and fall short of your investment goals. So it’s important to understand what you hope to get out of following a couch potato approach to make sure that it’s right for you. Otherwise, lazy investing might prove disappointing to you if your returns aren’t what you expected.

How to Build a Lazy Portfolio

Building a lazy portfolio starts with deciding what you want it to look like, i.e. one-fund, two-fund, three-fund, etc. Remember that for lazy portfolios, less is more. So you may want to cap the number of funds you choose at five.

Next, consider which funds are best suited to your needs, goals and risk tolerance. Index funds offer simplicity since they track broader market indexes. That can make diversification easier for you. If you want to choose a three-fund portfolio you might follow the earlier example and choose a U.S. stock fund, an international stock fund and a bond fund.

Keep in mind that the funds you choose don’t have to belong to the same company. You can mix and match funds if you want. But pay attention to the underlying assets, fund performance and expense ratios. The most important thing is to find a combination of funds that are going to help further your lazy investing goals.

The final step is automating your investments. Again, automating monthly contributions can help you take advantage of dollar-cost averaging. You can also benefit from the power of compounding interest. If you’re earning dividends from a lazy portfolio, you might consider reinvesting those automatically as well if you don’t need them for current income. Automating is something you might be able to easily do if you’re investing through a robo-advisor.

The Bottom Line

Lazy portfolios can appeal to investors who want to be in the market while avoiding major headaches. Whether a lazy portfolio approach is right for you can depend on your investing style and what you hope to achieve as an investor. Getting to know different funds and studying lazy portfolio examples can help you decide if it makes sense for you.

Tips for Investing

  • A 60/40 portfolio is another option for lazy investing. With a 60/40 portfolio, 60% of your portfolio is held in stocks and the other 40% consists of bonds. You can invest in individual stocks or bonds or buy mutual funds, index funds or ETFs. A 60/40 portfolio can be easy to maintain through regular rebalancing. But think about what kind of trade-off you might be making with regard to returns by keeping a larger percentage of your portfolio in bonds.
  • Consider talking to a financial advisor about the pros and cons of choosing a lazy portfolio approach. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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Understanding How a Lazy Portfolio Works - SmartAsset (2024)


What is a lazy portfolio? ›

A Classic Lazy Portfolio contains the main traditional asset classes, with the aim to achieve above-average returns while taking a below-average risk. A Modern/Alternative Lazy Portfolio can use particular assets/strategies, with the aim of obtaining an extra return.

What is the maximum drawdown of a lazy portfolio? ›

Each Lazy Portfolio had a maximum drawdown exceeding -35% over the past ten years. Some of the worst Lazy Portfolios exceeded -40% in the same time frame.

How to build a lazy portfolio? ›

Building a lazy portfolio starts with deciding what you want it to look like, i.e. one-fund, two-fund, three-fund, etc. Remember that for lazy portfolios, less is more. So you may want to cap the number of funds you choose at five. Next, consider which funds are best suited to your needs, goals and risk tolerance.

What is a 70 30 investment strategy? ›

A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds.

What is the 3 portfolio rule? ›

The three-fund portfolio consists of a total stock market index fund, a total international stock index fund, and a total bond market fund. Asset allocation between those three funds is up to the investor based on their age and risk tolerance.

What is the 5 portfolio rule? ›

The 5% rule says as an investor, you should not invest more than 5% of your total portfolio in any one option alone. This simple technique will ensure you have a balanced portfolio.

What percentage gains does a 50% drawdown require to return to break even? ›

From a mathematical perspective, it is important to remember that a drawdown of 50% requires a return of 100% to break even again.

How much drawdown is acceptable? ›

This entirely depends on individual risk tolerance or personality type. An aggressive trader can tolerate a higher-level drawdown, whereas a conservative investor will tolerate a lower level of drawdown. However, it is always recommended for investors and traders that drawdown should be kept below the 20% level.

What is the difference between drawdown and maximum drawdown? ›

The drawdown duration is the length of any peak to peak period, or the time between new equity highs. The max drawdown duration is the worst (the maximum/longest) amount of time an investment has seen between peaks (equity highs).

What is the 60 40 portfolio rule? ›

Once a mainstay of savvy investors, the 60/40 balanced portfolio no longer appears to be keeping up with today's market environment. Instead of allocating 60% broadly to stocks and 40% to bonds, many professionals now advocate for different weights and diversifying into even greater asset classes.

What is the Golden Butterfly portfolio? ›

The Tyler Golden Butterfly Portfolio is a High Risk portfolio and can be implemented with 5 ETFs. It's exposed for 40% on the Stock Market and for 20% on Commodities. In the last 30 Years, the Tyler Golden Butterfly Portfolio obtained a 7.68% compound annual return, with a 7.75% standard deviation.

What is the lazy investor strategy? ›

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.

What is the 10 5 3 rule of investment? ›

The 10,5,3 rule offers a simple guideline. Expect around 10% returns from long-term equity investments, 5% from debt instruments, and 3% from savings bank accounts. This rule helps investors set realistic expectations and allocate their investments accordingly.

What is 4 3 2 1 investment strategy? ›

The 4-3-2-1 Approach

One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.

What is the 3% rule of investing? ›

It suggests that 10% of your portfolio should be allocated to high-risk, high-reward investments, 5% to medium-risk investments, and 3% to low-risk investments. By following this rule, you can spread your investment risk across different asset classes and investment types, such as stocks, bonds, real estate, and cash.

What is a dummy portfolio? ›

Your Own Free Dummy Stock & Crypto Trading Portfolios

Setting up a dummy trading portfolio (also called a mock or virtual portfolio) is one way aspiring teen investors can overcome the fear of taking that first step in investing.

What is an underperforming portfolio? ›

If an investment is underperforming, it is not keeping pace with other securities. In a rising market, for example, a stock is underperforming if it is not experiencing gains equal to or greater to the advance in the S&P 500 Index.

What is the Lazy 3 fund portfolio? ›

Three-fund lazy portfolios

These usually consist of three equal parts of bonds (total bond market or TIPS), total US market and total international market.

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