Investing should be dull. It should’nt be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas…it is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office. -Paul A. Samuelson, Nobel economist
We all need lazy portfolios because we all have more important things to do than worrying about our investments everyday. We need a portfolio that works on autopilot, and we do not need the advice of Wall Street or all the hype that goes on Wall Street and related media. That is all just information overload. You cannot really beat the market over the long run because the future is random and unpredictable. You do not want to market time, you do not want to spend time looking for the needle in the haystack( the next great stock). You do not want to trade often, because the greater you trade, the less you earn. You just need the lazy portfolios, which is what 99% of the world needs. These portfolios make investing very, very simple. There are no commissions, taxes are low and expenses are very low. You just buy indexes and hold forever, this may look average, but over the long run, this will beat 99% of all investors. These portfolios will give you an average of around 10% in the very long run.
1. The Couch Potato Portfolio: 50% Vanguard 500 Index Fund + 50% Vanguard Total Bond Market Index Fund
2. The Sophisticated Couch Potato Portfolio: 75% Vanguard 500 Index Fund + 25% Vanguard Total Bond Market Index Fund
3. The Coffeehouse Portfolio: Based on principles of saving, diversification and indexing: 60% stocks, 40% bonds- can be tweaked on how much risk you want to take.You can choose to rebalance or not.
40% Vanguard Total Bond Market
10% Vanguard S&P 500
10% Vanguard Large-Cap Value
10% Vanguard Small-Cap
10% Vanguard Small-Cap Value
10% Vanguard International
10% Vanguard REIT
3. Dr. Bernstein’s Basic No-Brainer Portfolio:
25% Vanguard 500 Index
25% Vanguard Small Cap Index
25% Vanguard European Stock Index
25% Vanguard Total Bond Market Index
4. Dr. Bernstein’s Coward’s No-Brainer Portfolio:
40% Short-Term Corporate Bond
15% Total Stock Market
10% Small Cap Value
10% Large Cap Value
5% European Stock
5% Small Cap
5% Emerging Markets
5. Kiplinger’s Keep-It-Simple Portfolio:
25% US Large Cap( Vanguard S&P 500 or Vanguard Total Stock Market)
25% Foreign Stocks( Vanguard EAFE or Vanguard Total International Stock Market)
25% Small Cap Stock Funds( Vanguard Small Cap or Vanguard Small Cap Value)
25% Domestic Bond Funds( Vanguard Total Bond Market or Vanguard Short-Term Bond Index)
6. Merriman’s 10 Asset Class Portfolio: You can find them at paulmerriman.com
US Large Cap
US Large Cap Value
US Small Cap
US Small Cap Value
International Large Cap
International Large Cap Value
International Small Cap
International Small Cap Value
7. Eric’s Keep-It-Simple Portfolio
20%-80% bonds depending on how much risk you need to take and your age( older-more bonds)
2/3rds of the stock portion: Vanguard Total Stock Market
1/3rds of the stock portion: Vanguard Total International Stock
8. Dilbert’s Anti-Weasel Defense Portfolio
70% Vanguard Total Stock Market
30% Vanguard Total Bond Market
9. Aronson Family Portfolio
Domestic Stock Funds(40%)
5% Vanguard Total Stock Market
15% Vanguard S&P 500
10% Vanguard Extended Market Index
5% Vanguard Small Cap Growth
5% Vanguard Small Cap Value
Foreign Stock Funds(30%)
15% Vanguard Emerging Markets
10% Vanguard Pacific Index
5% Vanguard European Index
Fixed Income Funds(30%)
10% Vanguard Inflation Protected Securities
10% Vanguard Long Term Treasury
10% Vanguard High Yield Corporate
10. Nobel Prize Winner’s Beautiful Portfolio
50% Equities- Vanguard Total Stock Market
50% Bonds – Vanguard Total Bond Market
The above laziest portfolios give good returns with minimal effort because of many reasons. These include:
1. Market timing never will win in the long run because the market is totally random, irrational and unpredictable. Even in studies where it seems to win, once you take trading, taxes and slippage costs, they will never win. Schwab did a wonderful little study that illustrates this point. It is called the costs and benefits of waiting to invest. This study shows that investing regularly is what will help you win in the long run and not market timing. Yes, there are technical anomalies like momentum that can be exploited but for most of us, just simple buy and hold forever is the way to go.
2. Frugality leads to increased savings and this leads to increased wealth. In matters of investing, frugality means to focus on asset allocation and invest in funds with low expense ratios.
3. The magic of compounding in these lazy portfolios will definitely make you financially comfortable over the long run.
4. These lazy portfolios focus on asset allocation, regular investing in low cost index funds, global diversification and holding forever. Yes, you can add rebalancing but that is not the most important, if you do not want to do it. The main trait required for doing this is discipline, day in and day out for decades.
5. These lazy portfolios focus on buy and hold forever. This wins because the market is irrational and unpredictable and it is difficult, if not impossible to beat it. The more you trade, the less you earn. You can easily trade online today, but that makes losing just easier. Human nature makes investors buy high and sell low-losing at the top and bottom. We often think we are beating the market, but we really are not. Even great traders don’t become very rich. Buy good quality funds and hold forever- you will be on the way to success in investing.
6. These portfolios do not require any advisors, if you have the discipline to keep up with it. You will win the race just like the tortoise beat the hare.
Vanguard and iShares are probably the best to invest with. You also need to max out your tax-deferred retirement plan and invest in the most lazy funds with the best global diversification that you can get your hands upon.
You can also consider a single fund among these:
- Balanced funds: Dodge and Cox Balanced, Vanguard Wellington, Fidelity Puritan
- Asset allocation funds: Fidelity Asset Manager, Vanguard Asset Allocation Fund, Schwab MarketTrack, TIAA-CREF Managed Allocation Fund
- Lifecycle Fund: Fidelity Freedom Funds, Vanguard’s Life Strategy Funds
- Fund of Funds: Vanguard Star, T. Rowe Price Spectrum Growth
Instead of using index funds, you can also use index ETFs ( Vanguard, iShares and SPDR are some of the well known ones)
Many people think they can time the market and actively trade. If you think so, then see whether you fulfill the following criteria:
- You have lots of time to track the market and trade.
- You know the market is irrational and you can handle uncertainty and you have the discipline to follow your technical timing system, no matter how unpredictable the outside world appears.
- You are okay with losing money, as you have faith that you will more than you lose in the long run.
- You are very disciplined as a market timer.
- You can handle losing streaks.
- You do not care about any breaking news and you just trust your system.
- You never buy high and sell low.
- You make quick decisions, with no regrets.
- You are happy with making modest amount of money, as most people only manage that.
- You are not overconfident and you are objective about yourself.
Some people like Kiyosaki, recommend that you should leverage on other people’s money and build your own business and make a lot of money, but it is not easy as it sounds. But if you are really keen, you can read his books and see if they make sense to you.
You can make you grandchildren millionaires by the time they are old by buying index funds for a sizable amount when they are born and not touching it at all.
If you want some excitement, invest 90% in index funds and invest 10% in trading, timing or buying exotic stocks.
We want to invest because we want freedom, freedom from worry about money. It does not matter if we outperform the market or not. We need enough to be financially free. One of the first things is that you need a positive mental attitude. This is a state of mind and success is a state of mind. And if you follow lazy portfolios and do what you love to do, you have succeeded and most likely will succeed financially as well.
Some books you can read on this path for lazy investors are:
- The four pillars of investing by William Bernstein
- The coffeehouse investor by Bill Schultheis
- It’s only money by Scott Burns
- Ordinary people, extraordinary wealth by Ric Edelman
- Eight steps to seven figures by Charles Carlson
- The millionaire mind by Thomas Stanley
- The millionaire next door by Thomas Stanley and William Danko.
- Getting rich in America by Dwight Lee and Richard Mckenzie
- Millionaire by Wayne Wagner and Al Winnikoff
- Retire young, retire rich by Robert Kiyosaki
- The Warren Buffett Way by Robert Hagstrom
- Take on the street by Arthur Levitt
- Bogle on mutual funds by John Bogle
- A random walk down Wall Street by Burton Malkiel
- How to be your own stockbroker by Charles Schwab
- One up on Wall Street by Peter Lynch
- The great mutual fund trap by Gary Gensler and Gregory Baer
- Get a life: you don’t need a million to retire well by Ralph Warner
- The 9 steps to financial freedom by Suze Orman
- Making the most of your money by Jane Bryant Quinn
- Do what you love, the money will follow by Marsha Sinetar
- Don’t worry, make money by Richard Carlson
- Money and the meaning of life by Jacob Needleman
- Investment madness by John Nofsinger
- Mind over money by John Schott
- Success through a positive mental attitude by Napolean Hill and W. Clement Stone
notes from the book: The Lazy Person’s Guide To Investing by Paul Farrell