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Are ‘Lazy Portfolios’ Right for You?

If you think investing has to be complex and require constant monitoring, then think again. As it happens, the best strategy for growing one’s nest egg over the past decade may have come down to being lazy. Let me explain.

Lazy Person's Guide to Investing - Paul FarrellAbout a decade ago, Paul Farrell wrote the book The Lazy Person’s Guide to Investing (Business Plus, 2004). He’s been tracking the performance of these portfolios ever since, which can be viewed live at the MarketWatch Lazy Portfolio page.

Eight of the portfolios Farrell tracks have three things in common: They are simple, low-cost and diversified. More important, a fourth thing they have in common is that they all roughly doubled in value over the past tumultuous decade.

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These brilliantly simple portfolios were developed by some really smart people, such as financial theorist William Bernstein and Yale University endowment manager David Swensen. All use what are known as index funds, a type of mutual fund that tracks a market index. Instead of paying a lot of money for a professional to pick which stocks and bonds to hold, an index fund simply owns everything in that index and holds it for the very lowest fees.

The simplest of the eight portfolios was developed nine years ago by my son, Kevin, with a little help from me. This Second Grader Portfolio holds only three funds: a total U.S. stock index fund, a total international stock index fund and a total U.S. bond fund. With just these three funds, investors essentially own every publicly held company on the planet and all investment-grade U.S. taxable bonds. Arguably, you can’t get more diversified in stocks, no matter how many funds you own. These index funds are offered by firms such as Vanguard, Schwab, iShares and Fidelity, and they have annual expenses as low as 0.04 percent, which translates to $4 for every $10,000 invested.

One critical element of all eight lazy portfolios is that they had to keep a consistent allocation of each of the individual funds, meaning one has to rebalance when stocks either surge or plunge. So when stocks tanked in 2008 and early 2009, it meant investors had to sell bond funds to buy more stock funds — the opposite of what most investors did. Though the strategy is simple, I never said it was easy to implement. It was much easier for my son because money didn’t mean much to him at that age.

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So, in my opinion, all eight lazy portfolios are likely to outperform the more sophisticated and expensive portfolios. They minimize expenses and emotions and maximize diversification and discipline. Be sure to pick a portfolio that is compatible with how much risk you want to take. A moderate-risk portfolio would have about 50 percent to 60 percent in stocks, but a conservative portfolio should have no more than 30 percent in stocks.

Photo: Paul Farrell


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