Lazy portfolios, low-cost investment strategies that typically consist of a few diversified index funds or ETFs. They are designed to minimize management effort and costs while providing solid performance across various market conditions. The core principle is to maintain a diversified asset allocation, often including a mix of stocks and bonds, which can be periodically rebalanced to maintain the desired risk level. This approach leverages the benefits of passive investing, aiming for long-term growth with minimal intervention.
From a wealth management perspective, lazy portfolios are highly useful due to their simplicity and cost-effectiveness. By focusing on broad market indices, they reduce the need for constant monitoring and active management, which can be both time-consuming and expensive. The periodic rebalancing ensures that the portfolio remains matched with your risk tolerance and investment goals, providing a disciplined approach to investing.
Moreover, the use of index funds or ETFs in lazy portfolios typically results in lower expense ratios compared to actively managed funds. This cost efficiency can significantly improve net returns over the long term, as lower fees mean more of your money remains invested and compounding.
You can invest in broad U.S. and international markets, as well as bonds, using only two funds as shown in Table 11.10. Expense ratios are in braces.
This approach provides exposure to global equities and a stable bond component, ensuring diversification and simplicity.
Several popular authors and columnists advocate for three-fund lazy portfolios, which generally consist of three equal parts: bonds (either total bond market or treasury inflation-protected securities (TIPS)), the total U.S. stock market, and the total international stock market. While the specific percentage allocations may vary, these funds typically form the core of Vanguard’s Target Retirement and LifeStrategy funds. The expense ratios for these funds are in braces.
Adjust your allocation as described in age-based models, based on your risk tolerance or age. A good rule of thumb is to allocate a percentage in bonds equal to your age; for example, if you are 50 years old, 50% of your portfolio should be in bonds.
The three-fund lazy portfolio offers a balanced, low-cost, and easy-to-manage investment strategy. It can be tailored to individual risk preferences and financial goals, making it a versatile option for many investors.
Rick Ferri proposed the “Core Four” portfolio, consisting of four low-cost, total market funds that form the cornerstone of a diversified investment strategy. Exact allocation percentages are not critical; rounding to the nearest 5% is acceptable.
Investors can customize it further by adding value stocks (both US and international) or by splitting the bond portion between treasury inflation-protected securities (TIPS) and nominal bonds. This adjustment would create a slightly more conservative version of David Swensen’s model portfolio, which includes less international stock and REIT exposure but maintains the same four base funds plus TIPS.
David Swensen, the Chief Investment Officer of Yale University and author of Unconventional success,78 also advocates for a “lazy portfolio” strategy. His approach emphasizes low-cost, tax-efficient total market funds, a significant allocation to real estate, and treasury inflation-protected securities (TIPS) as illustrated in Table 11.14. The recommended portfolio splits its allocation with 70% equities and 30% fixed income. However, the portfolio can be adjusted to reflect alternative equity/bond allocations. Note that different weightings of international stocks would result in varying returns. Swensen’s strategy is designed to be simple yet diversified, aiming to achieve steady growth while minimizing costs and taxes.