How to Build the Best Lazy Portfolio

Woman laying in a hammock checking her investments on her smartphone.
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Jordan Bauer / Unsplash

A "lazy portfolio" is a collection of investments that takes almost no effort to maintain. It is a passive investing strategy. Lazy portfolios are best suited for people who invest for the long term and won't need their money for 10 years or more. They are part of a ​buy-and-hold investing strategy, which works well for many people. This method reduces the chances of making poor choices based on emotions such as fear, greed, or boredom. It also means that you don't need to respond to every little change in market value.

Being lazy can be a good thing when it comes to investing. You can achieve above-average returns while taking a below-average risk, because of some key features of this simple "set it and forget it" technique.

Key Takeaways

  • Index investing is an easy investment strategy with a solid track record of success.
  • Automate your investments, and use dollar-cost averaging.
  • Even if you're using a "lazy" portfolio, you should rebalance it yearly to ensure that you're sticking to your plan.
  • Instead of creating a portfolio on your own, buy one target-date fund that balances assets for you.

Invest in Index Funds

Index investing gets at the core wisdom of a passive approach. With index funds, you invest in exchange-traded funds (ETFs) that track an index (such as the S&P 500). These funds match the broad-market performance of an index. They don't try to beat the market.

Mutual funds, on the other hand, are run by experts, and even experts make mistakes sometimes. Fund managers might make poor timing choices or let their emotions guide them, but an index fund doesn't have that problem.

Set Up a Systematic Investment Plan (SIP)

One great method you can use to be lazy is to make your investments automatic. A systematic investment plan (SIP) helps you do this. With a SIP, you make a schedule of payments that are used to buy into a mutual fund at even times.

Using a SIP means you don't have the risk of market timing, and your share prices will work out to be lower, too. That's because when you evenly space out your buys, you can purchase more shares when they're priced low. This is called "dollar-cost averaging."

Use No-Load Funds

Sales charges are called "loads." They are designed to be a form of payment to brokers and other people who are paid on commission for their services. A no-load fund doesn't collect these sales charges.

Choosing no-load funds will keep costs low, which will also improve your returns.

Build a Simple Portfolio of Mutual Funds

A common long-term portfolio structure is called "core and satellite." Select a "core" holding, such as one of the best S&P 500 index funds, and have it make up the largest portion of your portfolio. The other funds you choose, the "satellites," should each make up a smaller portion.

A core and satellite portfolio aims to achieve above-average returns with below-average risk.

Your goal is to use these funds to make your holdings diverse while still beating a benchmark in terms of returns.

Rebalance Your Portfolio

Rebalancing a portfolio means returning your allocations to the original balance. You may need to buy or sell some shares of your current funds to achieve that balance.

For instance, say your lazy portfolio contains four mutual funds, allocated to 25% each. If your funds are no longer in this balance, you'll have to sell shares of some, and buy shares of another, to bring them back into balance.

Rebalancing is a vital aspect of building a portfolio of mutual funds, just as an oil change or tune-up is to your car. In some cases, you may be able to set up an automatic rebalance. But if not, you should make a note to do it once per year. You don't need to do it more often than that. Just pick a date, such as your birthday, and rebalance it at the same time each year.

Lazy Portfolio Example

A popular choice is a three-fund lazy portfolio using Vanguard funds. There are many ways to allocate the three funds, but here is one way to do it:

  • 40% Vanguard Total Stock Market Index Fund
  • 30% Vanguard Total International Stock Index Fund
  • 30% Vanguard Total Bond Market Index Fund

In this example, you can use one mutual fund company, Vanguard Investments, which offers many no-load index funds. The funds chosen provide broad diversification, varied market capitalizations, worldwide exposure, and broad bond market exposure.

One-Fund Portfolio

You can also choose the laziest portfolio of all: the one-fund portfolio. To do this, select a balanced fund, which will often have a stated and fixed allocation of stocks, bonds, and cash. For instance, many balanced funds contain a mix of 60% stocks, 30% bonds, and 10% cash.

Another one-fund option is to use a target-date fund, which invests toward a certain date in the future. These funds are common in 401(k) plans and can be used in the one-fund approach.

If you are investing for retirement, you may consider a target retirement fund. For instance, someone who plans to retire in or near the year 2030 could choose Vanguard Target Retirement 2030 (VTHRX). As the target year draws closer, the fund manager will begin to decrease the stock allocation. They'll also increase the bond and cash allocations, bringing the mix toward a more conservative balance. All you have to do is keep holding the fund.

Target-date funds are the ultimate "lazy portfolio," but there are no one-size-fits-all funds. If you invest conservatively, you'll want to avoid funds with an aggressive allocation. You may want to do a little homework before you invest, by checking the asset allocation of the target-date fund you had in mind.