Here at Wealth Daily, we’re focused on helping you save and invest for a comfortable retirement. Research suggests that Americans are not very good at these things when we’re left to our own devices.
According to a study by the Economic Policy Institute (EPI), almost half of American families have no retirement savings at all — and the median balance is just $5,000.
We are, however, aware of our dire collective financial situation. A recent survey by the American Psychiatric Association showed that financial anxiety is skyrocketing — and that two-thirds of Americans are uncomfortable with their current financial situation.
You might think that this financial anxiety is a good thing — that it motivates financially-underprepared people to improve their situation.
But all too often, anxiety begets procrastination, not progress. Especially when it comes to a complex task like setting up an investment strategy to provide for yourself in old age.
That’s why, for some people, a simple-but-functional investment strategy is better than a complicated scheme.
What’s a Lazy Portfolio? And Why Should You Consider One?
Enter the lazy portfolio. This low-stress approach to long-term investing involves buying just a handful of broad-based index funds or exchange-traded funds (ETFs) and rebalancing them once a year. That means selling some shares of the best-performing funds and buying some shares of the worst-performing funds to keep them in their original proportions.
Lazy portfolios generally manage annual returns of 8% to 10%, depending on market conditions and which portfolio you’re using. In other words, they significantly outperform the average equity fund investor, who earned an annual return of just 5.19% from 1995 to 2015.
These strategies require just 15 minutes of rebalancing work each year to maintain. They’re also some of the least-expensive investment strategies in existence, in terms of both fees and taxes.
In this report, we’ll outline four of the most popular lazy portfolios.
The “One-Fund Portfolio” — Balanced Funds and Target Date Funds
Perhaps the laziest portfolios of all are fully-automated “one fund” portfolios — target date funds and balanced funds.
Target date funds are mixes of equities and fixed-income investments which automatically change allocation over time. They tend to start very equity-heavy, becoming more conservative and bond-heavy as they approach a target retirement year (which is often listed in the fund’s name).
Balanced funds are similar mixes of equities and bonds, but they have static allocations which don’t adjust over time. They tend to have names that describe their makeup, like “Aggressive Allocation” or “Conservative Allocation.”
There are certainly advantages to one-fund portfolios. You can’t get any easier (or lazier) with your investment strategy. There’s no rebalancing, no transactions of any kind, really, involved with this approach.
But these ultra-lazy portfolios also come with some pitfalls. Target-date and balanced funds don’t give you any control over your asset allocation. Different funds can have very different ideas of what allocation is appropriate for a given time horizon (or even what “aggressive allocation” or “conservative allocation” means in the case of balanced funds).
One-fund portfolios are also significantly more expensive than the other approaches we’ll discuss in this report. Some target-date and balanced funds have expense ratios near 1% — several times the expense ratios of most index funds.
So if you’re really too lazy to do 15 minutes of rebalancing work a year, the one-fund approach might be right for you. If you’d rather save money and have more control over your risk and returns, read on.
The Two-Fund Portfolio
If you’re not quite lazy enough to spring for the one-fund portfolio, but you don’t want to bother with multiple equity funds, consider a two-fund portfolio.
These consist of a world stock market ETF like the Vanguard Total World Stock ETF (NYSE: VT) and a total bond market ETF like the Vanguard Total Bond Market ETF (NASDAQ: BND).
(Note: This report will use Vanguard ETFs as examples whenever possible due to their popularity and low expense ratios. Feel free to use similar ETFs from other issuers.)
That’s it — just one fund tracking the world’s equities (specifically the FTSE Global All-Cap Index, or something like it) and another tracking the U.S. investment-grade bond market (the world’s most stable bond market).
As a general rule, younger lazy portfolio investors, whether they’re going for the two-fund, three-fund or four-fund approach, should be more aggressive and own a higher proportion of stock. And as they age, they should gradually shift to a more conservative, bond-heavy allocation.
Thus, a twenty-something investor’s two-fund portfolio might be 85% stocks and 15% bonds.
A slightly older investor — say, a peak-earner in their 40s or 50s — would probably opt for a more conservative allocation, like 60% stocks and 40% bonds.
Meanwhile, a retiree might want to go 40% stocks and 60% bonds, or even less stock and more bond.
The Three-Fund Portfolio
Investors who want something a bit more sophisticated than the two-fund portfolio can add an international stock index to the mix, thereby creating a three-fund portfolio.
There are many advantages to adding international equities to a lazy portfolio. In any given year, the best-performing stock market in the world is usually outside the U.S.
Plus, foreign stock markets don’t necessarily follow our own, and they can be valuable holdings during U.S. downturns. During the Great Recession, for example, the MSCI China Index bottomed almost six months before American markets did. From October 2008 to April 2009, the Chinese index rose almost 30% while the S&P 500 sank 8.5%.
The Vanguard All-World Ex-US ETF (NYSE: VEU) provides good exposure to foreign markets (though any ETF tracking the FTSE All-World Ex-US index will do). And the Vanguard S&P 500 ETF (NYSE: VOO), or any other S&P 500 ETF, works great as a U.S. stock component in lazy portfolios.
Of course, while international stock markets often have higher returns than U.S. markets, they’re also usually riskier. Thus, three-fund portfolio advocates generally recommend devoting a smaller slice of the pie to the international stock ETF than the domestic stock ETF.
A young, aggressive investor’s three-fund portfolio allocation might be 55% U.S. stocks, 30% international stocks, and 15% bonds.
A moderate, middle-aged investor might allocate 40% to U.S. stocks, 20% to international stocks, and 40% to bonds.
And a retiree might go with 25% U.S. stocks, 15% international stocks, and 60% bonds.
Three-fund portfolios offer greater diversification and control than one- or two-fund portfolios, but they still lump all sorts of stocks — large caps, small caps, dividend payers, and non-dividend payers — into a single “stock” category. Our next type of lazy portfolio differentiates these, giving you even more control…
Stocks are an incredibly diverse asset class. Advocates of the four-fund portfolio argue that lumping them all into a single position, or simply sorting them into “U.S.” and “international” positions, means missing out on the advantages of different types of stocks.
That’s why they add a fourth fund, representing a specific type of U.S. equity other than the S&P 500, to their lazy portfolios.
Which type of U.S. equity? That depends on who you ask.
Growth-focused four-funders tend to include a small-cap ETF like the Vanguard Small-Cap ETF (NYSE: VB). Income investors like to throw in real estate investment trusts (REITs) through something like the Vanguard Real Estate ETF (NYSE: VNQ). And gold bugs round out their four-fund portfolios with a gold ETF like the SPDR Gold Trust (NYSE: GLD).
We’re not taking sides about which fourth fund is best, but there is a uniquely-convenient aspect of a four-fund portfolio which includes an REIT fund.
Since REITs generate income, a four-fund investor with an REIT fund could keep their portfolio in the same “four quarters” configuration for their entire life, earning strong returns through income reinvestment in their younger years, and living on combined bond and real estate income during retirement.
What Lazy Portfolios Can’t Do
These strategies have a long history of outperforming the average investor, and they’re significantly safer than letting all your money ride on a single stock index. Plus, they take just 15 minutes a year to maintain.
But are they the highest-returning strategies in existence? No.
As Warren Buffett once said, “Wide diversification is only required when investors do not understand what they are doing.”
Now, a lot of investors don’t know what they’re doing. And there’s absolutely no shame in that. Many investors lack the time to learn the art of stock selection or the resources to afford an active manager. For them, a lazy portfolio is a pretty good idea.
But there is another option, one that can earn much higher returns than lazy portfolios. You can subscribe to a newsletter and have a team of time-tested experts pick winning stocks for you.
Wealth Daily contributor and Technology and Opportunity editor Jason Stutman is one of those experts. His Technology and Opportunity subscribers recently netted a gain of more than 140% on Envision Solar (NASDAQ: EVSI) in less than eight months.
The 11.35% average annual gain offered by the four-fund REIT portfolio might sound impressive — especially when compared to the 5.19% annual return of the average investor. But it pales in comparison to the triple-digit gains that Jason routinely wins his subscribers.
Out of all of the low-stress investment strategies we’ve profiled in this report, this one is by far the most lucrative. Click here to learn more.
Until next time,
Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to Wealth Daily. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, click here.