A lazy portfolio is a portfolio of low-maintenance investments that require minimal effort to keep it running smoothly. You don’t need to be an investing wizard or financial whiz kid to build a solid portfolio. In fact, in most cases the simpler your strategy, the better. Especially if you are not a finance professional.
Making things simple means cutting out unnecessary costs and complications so you can invest with peace of mind rather than worry about hidden pitfalls. There are plenty of ways you might be undermining your own ability to grow your savings in an efficient way when you choose an active investing strategy.
When done right, the “invest and forget” kind of approach is generally the best option for the average investor.
The lazy portfolio is a type of passive investing approach. Investors don’t actively choose individual stocks for creating a lazy portfolio. Common ways of building a lazy portfolio are either investing in ETFs or using automated tools. For example, a lazy portfolio might consist of index funds that track major stock market indexes such as the FTSE 100 and S&P 500.
This hands-off approach to investing can appeal to investors who don’t want to spend a lot of time monitoring their portfolios while still achieving long-term gains.
Reasons to choose a lazy portfolio approach
1) Active investing can be costly!
There’s no denying that an active investing approach can be costly. The average cost of opening a brokerage account on one of the popular investment platforms is very low. However, this small fee quickly adds up once you start buying stocks. There are fees associated with selling and trading stocks which can easily erode your gains. You may also need to pay taxes on investments.
Investing can also be time-consuming. Whether it’s researching new stocks or choosing between different types of funds, you’re investing time that could be spent doing other things. And if you have a full-time job, you may not have the time to invest in the way you want to. So, another cost of investing is the opportunity cost. If you’re not taking advantage of your investment dollars by working or spending time with friends and family, you’re forfeiting an opportunity.
2) Diversification
Mutual funds are one of the most popular and cost-effective ways to build a diversified, low-risk lazy portfolio for investors.
One benefit of mutual funds is that they are typically less costly than buying individual stocks. This is because mutual funds charge a fee for managing your money instead of paying all the expenses yourself. If you want to invest in only one or two stocks, it makes sense to pay the expense yourself rather than pay a fee to manage hundreds or thousands of stocks at once.
A three-fund lazy portfolio using ETF funds can be a good and diversified passive investment approach. It can be a good way to take advantage of the low cost, diversification, and tax efficiency offered by ETF funds. The portfolio includes a mix of Vanguard index funds.
An efficient three-fund lazy portfolio can consist of three ETF funds:
- Total Stock Market Index Fund,
- Total International Stock Index Fund,
- Total Bond Market Index Fund.
By investing in index funds, you are essentially investing in a basket of stocks that track an index like the S&P 500 or the FTSE Global All Cap. This means that you are buying a representative sample of the entire stock market at one price instead of buying fractions of each individual company in the market.
Checking Vanguard or Fidelity index tracker funds is a good starting point for people who want to start investing but don’t know where to begin. You can see your portfolio grow over time without having to pick individual stocks or allocate too much of your portfolio in one area.
3) Automated lazy portfolios
Automating your investments is one of the ways to build a lazy portfolio. With this approach, you need to set up an investment account that automatically invests a fixed amount of money each month. There are a number of ways to automate your investments.
A popular approach is using an automated investment platform (e.g. robo-advisor) to make regular investments in your portfolio.
Automation platforms use algorithms to automatically manage your investments across different asset classes and timeframes, saving you time and effort while reducing risk.
For example, a robo-advisor can automatically rebalance your portfolio based on your overall asset allocation goals and risk tolerance. It will also monitor how much money you are spending and whether you are meeting your savings goals, helping you stay on track.
Automatic investing can also help prevent mistakes, such as forgetting to re-invest dividend income or underperforming because of poor timing.
4) Chasing short-term returns can be counterproductive
Researches show that timing the market is extremely difficult. Even for the most experienced professional investors.
it’s possible to lose your entire investment in just a few days during the volatile times of the market if you act impulsively when investing. It is not an easy business to stay disciplined through the ups and downs of the sentiment cycle of the markets.
This can be especially problematic if you’re investing in risky investments such as stocks and cryptocurrencies. In addition, short-term investing can also lead to higher fees. So if you’re looking to grow your investments safely, it may be better to look at adopting a long-term strategy that doesn’t require timing the market.
Lazy portfolio types and examples
Two-fund portfolio: It is the simplest lazy portfolio approach. You simply invest in two index funds, one that tracks the stock market and one that tracks the bond market. This approach is easy to manage and rebalance, and it offers a good level of diversification.
Three-fund lazy portfolio: Slightly more complex than the two-fund portfolio. With this approach, you invest in three index funds: one that tracks the stock market, one that tracks international stocks, and one that tracks bonds. This approach offers a good level of diversification and can be easy to rebalance.
Core four portfolio: It is the most diversified investment option among the three lazy portfolio approaches. With this approach, you invest in four index funds: one that tracks the stock market, one that tracks international stocks, one that tracks real estate investment trusts (REIT), and one that tracks bonds. This approach offers a higher level of diversification and exposure to varying asset classes.
Three main lazy portfolio approaches are mentioned here. Lazy portfolios can include many other financial products such as small-cap stocks, commodities, emerging market assets, and inflation-protected securities.
Bottom line
An active trading approach can be time-consuming and have significant costs associated with it. A lazy portfolio is a collection of investments that are automated and/or passive. The name “lazy portfolio” comes from the fact that these portfolios require very little work on the part of the investor. Instead of trying to pick individual stocks or actively manage their portfolios, investors in lazy portfolios simply set up their investment mix and let it ride. Lazy portfolios usually consist of index funds or exchange-traded funds (ETFs) that track major market benchmarks.
A well-diversified lazy portfolio can be the right choice for many investors to maximize their ROI and achieve financial freedom.
An accomplished financial analyst and writer, holds a Master’s degree in Finance from the University of Exeter, bringing his expertise to guide readers through the world of financial markets and investment strategies.
He has a special interest in the confluence of psychology and financial decision-making. His articles delve into the intricacies of financial markets, offering readers a keen understanding of complex economic trends and investment dynamics.
As an expert in the world of finance, possesses an in-depth knowledge of various investment vehicles, equity markets, and risk management strategies. He expertly navigates the complexities of the financial landscape, providing readers with actionable insights into stock market trends, bonds, derivatives, and other forms of investments.
With a keen interest in behavioral finance, he explores the fascinating interplay between human psychology and financial decision-making. He decodes the biases and irrational behaviors that often lead to sub-optimal financial decisions, offering readers strategies to overcome these pitfalls and make more informed, profitable choices.
Beyond individual investments, the author shines a light on macroeconomic indicators and their impacts on the financial markets. His articles help readers understand the ripple effects of policy changes, market volatility, and global events on their investments, equipping them with the knowledge to navigate these uncertainties.
