For those of you that read this blog on a frequent basis, you already have figured it out that I’m a strong supporter of a passive investment strategy and exchange-traded funds. Read this. I often write about one type of portfolio: 60% stocks + 40% bonds, and rebalance for the rest of your life. Of course, there is “more than one road that can lead to Rome”.
Today I’ll write about the best Lazy Portfolios out there. As always: this is not financial advice or any kind of advice. It’s only for information and discussion purposes.
What are Lazy Portfolios?
A lazy portfolio is a collection of investment products, usually passively managed exchange-traded funds (ETF), where you invest your money according to a fixed percentage (%) among those funds. For example, you decide to invest 60% of your money in the ETF A, and 40% in the ETF B.
It’s called lazy because you don’t anticipate the next big thing. You don’t actively manage your portfolio. It’s a “set it and forget it” strategy. Or if you prefer a “buy and hold” plan of action designed to achieve a long-term financial independence (and Early Retirement).
Once a year you sell, buy or reinforce your positions with your savings, to reset the % back to the initial allocation. A 5 minute per year task. That’s why they call it lazy.
1. Two Fund Portfolio – US only Exposure
This is the most often cited lazy portfolio: One ETF with stocks, and another one with bonds. Below I’ll give examples of ETF that an investor can use to replicate this strategy. There are many other options, this is only for example purposes.
- 60% Stocks US: SPDR S&P 500 Index – Ticker: SPY
- 40% Bonds US: iShares Core Total US Bond – Ticker: AGG
With this simple lazy portfolio, you’ll get exposure to a broad quality number of stocks and bonds.
SPY is the oldest ETF in the world (since 1993), has an Expense Ratio (ER) of 0.09% and over $250 Billions (04-05-2018) of assets under management. This fund contains all 500 stocks in the S&P 500 Index. It holds predominantly large-cap U.S. stocks. It pays dividends on a quarterly basis. The holdings are weighted by market capitalization.
iShares Core U.S. Aggregate Bond ETF (since 2003) has a broad exposure to U.S. investment-grade bonds. The ER is 0,06% and has over $55 Billion (04-05-2018) of assets under management. It holds over 6700 bonds. The Weighted Average Maturity of the bonds is 8.17 years. Thus considered intermediate-term bonds.
2. Two Fund Portfolio – World Stocks Exposure
Similiar to the first one, but with exposure both to US and International Stocks. This is my favorite one because it takes into account the possibility that international stocks will for some periods have superior returns when compared with US stocks. Therefore a good option to include if you believe in that possibility.
- 60% Stocks World: Vanguard Total World Stock ETF (VT)
- 40% Bonds: Vanguard Total Bond Market ETF (BND)
Invests in both foreign and U.S. stocks. An expense ratio of 0.10%. Fund total net assets are $16.1 billion (04-05-2018) distributed over 8000 stocks.
Provides broad exposure to U.S. investment-grade bonds. With an ER of 0.05%, you’ll get an ETF that is invested in over 8500 bonds, with an average effective maturity of 8.5 years. Fund total net assets $197.8 billion (04-05-2018).
3. Three Fund Portfolio
With this lazy portfolio option, you divide the stocks part into two ETF. Also, the allocation of your money could be slightly different (more aggressive, more risk).
- 34% Stocks US: Vanguard Total Stock Market ETF (VTI)
- 33% Stocks International: Vanguard Total International Stock ETF (VXUS)
- 33% Bonds: Vanguard Total Bond Market ETF (BND)
VTI invests only in U.S. stocks (Large-, mid-, and small-cap equity diversified across growth and value styles). An expense ratio of 0.04%. Fund total net assets are $672 billion (04-05-2018) distributed over 3600 stocks.
This ETF seeks to track the performance of the FTSE Global All Cap ex US Index, which measures the investment return of stocks issued by companies located outside the United States. The ER is 0.11%. Fund total net assets are $26 billion (04-05-2018) distributed over 6350 stocks.
4. Second Grader’s Starter
On this lazy portfolio option, you get a more aggressive (+ stocks) allocation of a three fund portfolio. Suitable for investors with a (very) long-term perspective. Or for investors who have more tolerance to risk.
- 60% Stocks US: Vanguard Total Stock Market ETF (VTI)
- 30% Stocks International: Vanguard Total International Stock ETF (VXUS)
- 10% Bonds: Vanguard Total Bond Market ETF (BND)
5. Dr. Bernstein’s Smart Money
Dr. William Bernstein is a physician and neurologist as well as a financial adviser. This one’s so simple: Allocate 25% in each of four index funds diversified across basic categories: S&P 500, Europe, Small Cap, and Total Bond.
- 25% Stocks US: Vanguard S&P 500 ETF (VOO)
- 25% Small-Cap Stocks: Vanguard Small-Cap ETF (VB)
- 25% Europe Stocks: Vanguard FTSE Europe ETF (VGK)
- 25% Bonds: Vanguard Total Bond Market ETF (BND)
VOO invests in stocks in the S&P 500 Index, representing 500 of the largest U.S. companies. An expense ratio of 0.04%. Thus cheaper than the SPY for example. Fund total net assets are $400 billion (04-05-2018) distributed over 500 stocks. Therefore one can conclude that the cheaper ER has attracted more assets.
VB seeks to track the performance of the CRSP US Small Cap Index, which measures the investment return of small-capitalization stocks. The ER is 0.05%. Fund total net assets are $84 billion (04-05-2018) distributed over 1400 stocks.
VGK seeks to track the performance of the FTSE Developed Europe All Cap Index, which measures the investment return of stocks issued by companies located in the major markets of Europe. The ER is 0.10%. Fund total net assets are $25 billion (04-05-2018) distributed over 1300 stocks.
6. “Warren Buffett” Lazy Portfolio
As strange as it seems, even Warren Buffett already talked about a lazy portfolio: 90% US Stocks ETF + 10% Short-term Quality Bonds ETF. He really believes in the long-term success of US.
- 90% Stocks US: Vanguard S&P 500 ETF (VOO)
- 10% Bonds: Vanguard Short-Term Treasury ETF (VGSH)
Invests primarily in high-quality (investment-grade) U.S. government bonds maintaining a dollar-weighted average maturity of 1 to 3 years. ER is 0.07%. This ETF is invested in over 90 bonds, with an average effective maturity of 2.0 years. Fund total net assets +$3 billion (04-05-2018).
7. GrowtoRetire.com Lazy Portfolio
For the average investor, I would always start with the good old fashion 60% stocks /40% bonds (two fund portfolio). I would also go with the world exposure over the US exposure. I believe that in the long term, international stocks will, sometimes, have a superior return when compared with the US. Having a world stocks ETF is perfect because it will automatically adjust the exposure.
One portfolio that I like to study is a special variation of the two fund portfolio. I’ve baptized it “GrowtoRetire.com Lazy Portfolio“.
- 60% Small-Cap Stocks: Vanguard Small-Cap ETF (VB)
- 40% Long-term Bonds: iShares 20+ Year Treasury Bond ETF (TLT)
The idea is to capture the small-cap factor plus the higher expected yield of long-term bonds.
TLT will get you exposure to long-term U.S. Treasury bonds. The inception date was 2002, and the ER is 0.15%. This ETF is invested in 30 bonds, with an average effective maturity of 17.39 years. Fund total net assets +$7 billion (04-05-2018).
Total Return of GrowtoRetire Lazy Portfolio
If you look at the image below, you will see what I love in this lazy portfolio: you have a similar return when compared with the SPY – even taking into account the bear market of October 2007 – March 2009 – but with nearly half of the volatility.
With this portfolio, you would have a total return of about 11.5%/year, with 11% of volatility.
With the SPY you would have a return of about 11.9%/year, with 19.9% volatility. Therefore resulting in a slightly higher return with a much higher volatility.
It’s worth mentioning that this exact portfolio has been lagging the SPY in the last 3 years – especially in 2017. Still, the volatility continues to be far inferior. Thus I do believe that in the long term it will deliver a better “Volatility-Adjusted Return“.
And you reader, what do you think about these lazy portfolios? Have any more examples? Do you use any?
Disclaimer: The information on this site is provided for information and discussion purposes only, and should not be misconstrued as investment advice. This is not financial advice or any type of advice.
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