Vincent wrote to tell me about “lazy portfolios”:
Paul Farrell of MarketWatch tracks a group of portfolios composed of index funds, and watches how they are performing vs. the S&P 500. He writes an update a couple of times a year, with both a long-term and short-term perspective. The portfolios consist of as many as eleven funds and as few as three funds. I like reading the series because year-after-year, without exception, these lazy portfolios beat the S&P 500 over the long term.
Farrell’s most recent analysis of these portfolios was in January. He wrote:
Unless you’re working full-time in the financial world, you don’t have the skills, tools, information, time or interest in playing the market, especially the bond market. And even if you do play the market, the odds are you’ll lose because the more you trade the less you earn; transaction costs and taxes kill returns. So for 94 million out of America’s 95 million investors, being a lazy investor is the best defensive strategy.
In fact, even the hotshots working full-time in the financial world follow the same strategy with the bulk of their assets. It’s their biggest secret. Mutual fund managers making an average $400,000-plus playing the market with your money, often lock away the bulk of their retirement assets in safe, untouchable portfolios using a variation of a lazy portfolio strategy. Why not, they’re no dummies, they’ve got families to protect too.
In his analysis, Farrell provides portfolios from five money experts. These are portfolios that you can emulate. Which one is best? Farrell says: “Any one is better than wasting your time chasing hot stocks and the other 8,000-plus actively managed funds, 80-85% of which underperform the market every year.”
When I finally pay off my debt (less than a year to go!), I plan to put the bulk of my money into index funds. (I’ll set some money aside to explore two other options: stocks that pay dividends and “value” investing.) I used to think it would be fun to get rich day trading — a story for another day — but in the last few years I’ve learned I’d rather spend my time writing. I’m happy to stick my money into an index fund and let the market take care of the growth. Lazy portfolios are perfect for me.
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