The passive way to investment success

coins growing plant

Many Americans conduct passive investing, which some call “lazy investing.” Though this is a common way to invest, it has its detractors.

I just finished reading Paul Farrell's The Lazy Person's Guide to Investing, for example, and I found myself drawn to the “lazy portfolios” he describes. Lazy portfolios done by are collections of index funds. Because these portfolios are balanced — they contain stocks and bonds — they mitigate risk while providing excellent returns. Best of all, they take very little time to maintain.

Reminder: An index fund is a low-cost mutual fund designed to mimic the movement of a specific market index. A Vanguard 500 index fund (like VFINX), for example, tracks the performance of the S&P 500. The chief virtue of index funds is that, over the long-term, they deliver better returns than most actively-managed mutual funds.

Related >> Are Index Funds the Best Investment?

Five Lazy Portfolios

It turns out that some of my favorite financial writers are also huge fans of passive investing. In fact, many of these writers have designed portfolios of their own. Here are some of the more prominent examples:

The Couch Potato Portfolio from Scott Burns

  • 50% — Vanguard 500 Index (VFINX)
  • 50% — Vanguard Total Bond Market Index (VBMFX)

This two-fund portfolio from financial columnist Scott Burns may be the simplest way to achieve balance. It's an even split between stocks and bonds, and should appeal to those investors who are both lazy and risk-averse.

The Three-Fund Portfolio from Andrew Tobias

  • 33.3% — Vanguard Total Stock Market Index (VTSMX)
  • 33.3% — Vanguard Inflation-Protected Securities (VIPSX)
  • 33.3% — Vanguard Total International Stock Index (VGTSX)

This three-fund portfolio from Andrew Tobias is exactly the same as Scott Burns' Margarita Portfolio. It introduces foreign stocks to provide additional diversification.

The No-Brainer Portfolio from William Bernstein

  • 25% — Vanguard 500 Index (VFINX)
  • 25% — Vanguard Small-Cap Index (NAESX)
  • 25% — Vanguard Total International Stock Index (VGTSX)
  • 25% — Vanguard Total Bond Market Index (VBMFX)

William Bernstein is a retired neurologist who has turned his attention to financial matters. He wrote The Four Pillars of Investing, which is one of the best books on investing I've ever read (my review). In that book, he offers a variety of possible investment portfolios. This “no-brainer” collection of index funds keeps things simple.

The Coffeehouse Portfolio from Bill Schultheis

  • 40% — Vanguard Total Bond Index (VBMFX)
  • 10% — Vanguard 500 Index Fund (VFINX)
  • 10% — Vanguard Value Index (VIVAX)
  • 10% — Vanguard Total International Stock Index (VGTSX)
  • 10% — Vanguard REIT Index (VGSIX)
  • 10% — Vanguard Small-Cap Value Index (VISVX)
  • 10% — Vanguard Small-Cap Index (NAESX)

The author of The Coffeehouse Investor believes that the secret to financial success is mastering the basics: saving, asset allocation, and matching the market. The latter can be done through a lazy portfolio. (Schultheis recently shared a guest post at Get Rich Slowly.)

Related >> How to Build Wealth, Ignore Wall Street, and Get on With Your Life

The Perfect Portfolio from Frank Armstrong

  • 31% — Vanguard Total International Stock Index (VGTSX)
  • 30% — Vanguard Short-Term Bond Index (VBISX)
  • 9.25% — Vanguard Small-Cap Value Index (VISVX)
  • 9.25% — Vanguard Value Index (VIVAX)
  • 8% — Vanguard REIT Index (VGSIX)
  • 6.25% — Vanguard Small-Cap Growth Index (VISGX)
  • 6.25% — Vanguard 500 Index Fund (VFINX)

Frank Armstrong III is president of a financial planning firm in Florida.

Note: These portfolios were constructed using mutual funds from Vanguard. Vanguard is probably the best source for index funds, but it's not the only source. My money is actually with Fidelity, which seems to have plenty of options.

Single-Fund Solutions

Building a portfolio of index funds may be lazy, but it's not for everyone. Some investors crave greater complexity or more control — or they believe they can outperform the market on their own. Others have no interest in building portfolios (even of just three or four funds) or are unable to afford the minimum investments. For this last group of people, there a range of single-fund solutions.

Many mutual fund companies now offer target-date funds, which attempt to create a diversified portfolio appropriate for a specific age group. Born around 1970? You may want to consider a fund like Fidelity Freedom 2035, which automatically adjusts its investment structure as time goes on. (You might also consider building your own target-date fund).

Related >> How to Create Your Own Target-Date Mutual Fund

There are other single-fund solutions, too, including these:

  • Vanguard STAR Fund (VGSTX)
  • T. Rowe Price Personal Strategy Balanced (TRPBX)
  • Fidelity Four-in-One Index (FFNOX)

Actually, the bulk of my retirement savings is currently in that last Fidelity fund. I've been too lazy to create a more detailed asset allocation. (And I do need to make some changes. FFNOX allocates 85% to stocks, and that's too much risk for me.)

Final Notes

If you adopt one of these lazy portfolios, remember to rebalance the funds every year. Over time, they'll get out of balance. Your Couch Potato Portfolio may have started with a 50/50 split at one point, but may look very different now. Rebalancing controls risk.

Passive portfolios appeal to me. The more involved I become with my day-to-day investment decisions, the more mistakes I make. I could save myself a lot of grief by putting my money into a lazy portfolio and then forgetting about it.

Are you a passive investor? If so, what does your portfolio look like? How do you decide which funds to buy? How often do you check how well your funds are performing? Any advice for those of us who are considering this strategy?

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Writer's Coin
Writer's Coin
11 years ago

Nice collection of lazy porftolios! I think a lot of times beginners feel that going with one of these is a cop out. That they should be picking their own stocks and being more involved. But in reality this is the best way for most investors. None of us have the time or the patience to really have a more active portfolio. There is no magic potion, but lazy portfolios of index funds are about as close as you’ll get because they’re actually doable and they work.

Brian S.
Brian S.
11 years ago

Also, the Three-Fund Portfolio is almost identical to the second grader’s portfolio.

Paul in cAshburn
Paul in cAshburn
11 years ago

When you’re investing in a taxable portfolio, remember two things: First, consider all investments you have to avoid doubling up. For example, if you’re collecting simple pension or annuity income, count that as bonds and keep the rest of your portfolio tilted away from bonds to compensate. Second, consider ETFs to avoid annual taxes on capital gains distributions. If, however, you’re inside a tax-advantaged vehicle (401k, TSP, etc.) no-load index funds (matching the lazy ideas in this post) should be fine. I agree that picking individual stocks is not a long-term strategy for most people. Even solid stocks eventually slide… Read more »

ABCs of Investing
ABCs of Investing
11 years ago

My portfolio is very lazy – mostly exchange traded funds with a few dividends stocks on top.

Andrea
Andrea
11 years ago

When I retire (soon), I think I am rolling over my TSp(federal 401K) into an external plan and will then rebalance with all my other investments. Of course, I hope to have more time in retirement to think about my investments(my only stock outside of a fund is Starbucks) but I like these suggestions!

Frugal Bachelor
Frugal Bachelor
11 years ago

Another asset allocation post, another post which doesn’t do justice to international, and totally ignores EM. Seriously, are you guys really so sure that the US equity market is going to outperform all other world markets that you are so overweight in it and are willing to bet your personal financial future on it?

http://investmentscientist.com/2009/05/07/lessons-from-harvard-timely-bet-on-emerging-markets/

Neal@Wealth Pilgrim
11 years ago

Not a fan of this approach generally but I am clearly biased because of my profession so take what I have to say with a big dose of salt.

I believe that the market is so volatile that such an approach could lead to disappointing results.

Also, I’m not a fan of bonds at all right now.

On top of that, you are young so equity is probably what you need even though it will be a bumpy ride.

FWIW.
Neal

Wise Money Matters
Wise Money Matters
11 years ago

I’m for a “lazy” style investing strategy also because you don’t worry about the investment so much. When you are constantly worrying about a particular company, you get emotional and can make bad decisions. When you are more generally investing in the stock market in something like an index fund, you just have to let the economy run it’s course. You would be less likely to move your funds elsewhere. Problems arise when you get scared and make investment decisions based on those fears.

bon
bon
11 years ago

These lazy portfolios are definitely appealing — but unfortunately many people are in a way forced to hold a significant portion of their investments in company-sponsored 401k or 403b plans — mine is with a firm with high fees, and I have few funds to choose from. Unfortunately this makes being able to use heuristics for asset allocation quite difficult. Of course when I leave my job I will roll everything into an IRA. But while I’m employed I feel trapped. Anyone have any recommendations on dealing with this?

Scott
Scott
11 years ago

Why no comparison on how these blends have performed over the past 10 years?

Pachael
Pachael
11 years ago

Agree with Frugal Bachelor.

I agree with the premise of lazy investing, but I think the asset allocations are all wrong. I’d put more in the Emergine Markets, they’re essentially small big caps.

DDFD at DivorcedDadFrugalDad
DDFD at DivorcedDadFrugalDad
11 years ago

Nice post.

These are all valid approaches, but don’t forget to rebalance at least quarterly. The percentage holdings will change in time– have the discipline to stick to the plan and reset them to the appropriate numbers.

jon fontaine
jon fontaine
8 months ago

quarterly is not necessary
yearly is sufficient

Jeremy Olexa
Jeremy Olexa
11 years ago

Nearly every Index Fund that I research has an extremely large initial investment. Any strategies for someone like myself that doesn’t have 10,000 to drop into an index fund?

Jack M
Jack M
6 years ago
Reply to  Jeremy Olexa

Jeremy,

Most index funds I see only require something like $3000 initially. Some will let you put in a smaller amount if you agree to automatically invest a certain amount every month.

miles ercolani
miles ercolani
11 years ago

I enjoy reading your articles on investing, I agree the four pillars of investing was a great novel, though I only skimmed through it. I will most likely use this information when investing on my own and will consider these funds.

Will Crowthers
Will Crowthers
11 years ago

Great outline and I love the breakdown of different types of portfolio’s for different people. I wrote about Lazy Investing on my blog here: http://www.twentysomethingsense.com/2009/01/investing-the-lazy-way.html

The bottom-line for me is that if you are just going to “toss your money over the wall” – make sure that its at least put somewhere that is diversified and minimizes fees!!

Again, outstanding article and breakdown – love it.

Amanda
Amanda
11 years ago

@Bon: Why don’t you put in the minimum for a match with your company and go ahead and START that IRA? Do a cost-analysis comparison on having the funds taxed now (to add them to the IRA) and the amount you spend already on the high-fees for the current account.

Andy Didyk
Andy Didyk
11 years ago

Just wanted to let you know that I’m a long time reader and beneficiary of your knowledge and this site.

I realized that I’ve been viewing your site in Firefox while using the Ad-Block plugin, and wanted to let you know that I’ve disabled it for your site so that you can start counting my impressions and clicks as part of your earnings. Thanks for all of the great work and keep it coming!

Nicki
Nicki
11 years ago

I’m with Jeremy (#12). Most of the index funds require at least 10K and if you find one that allows less than that they typically charge annual fees to be below that balance. Fidelity Four-in-One Index (FFNOX) does allow you to put in 2500 min as part of an IRA but it charges a fee. Any other good options?

John
John
11 years ago

If you don’t have enough to start off with multiple funds due to the minimums check out the Vanguard STAR Fund (VGSTX) https://personal.vanguard.com/us/FundsSnapshot?FundId=0056&FundIntExt=INT

It has a $1000 minimum and is basically a blend of other Vanguard Funds, essentially a one-stop lazy portfolio. Once you build it up to enough you could split it up into separate funds based on one of the above portfolios.

Dylan
Dylan
11 years ago

I am a real fan of the concept, but I hate calling them “lazy.” This *IS* the way to invest. “Lazy” implies that it is somehow a lesser deviation from the correct behavior. But this is how many financial planners, academics, finance authors and journalists actually invest. Select an asset allocation that’s appropriate to your own priorities. Implement it using low-cost, index funds. Maintain it through rebalancing. And, don’t mess with it unless your priorities change. SOmetimes the easiest answer is the best answer. As a financial planner myself, I disagree with Neil’s suggestion that the market is so volatile… Read more »

JerryB
JerryB
11 years ago

My RothIRA looks a lot like the Couch Potato Portfolio with the exception of allocation percentages. @bon (Comment #9), If you are unhappy with your company’s program make sure they know you are and why. You should be only investing the minimum to get your company match at this point and investing the rest of your retirement savings in an IRA, traditional or Roth, with a firm you are comfortable with. @DDFD (Comment #11) I’m lazy and only rebalance once a year. @Jeremy (Comment #12) Vanguard has a $3k minimum for most of it’s funds. Others will let you start… Read more »

Waves
Waves
11 years ago

General Question…. People keep talking about rebalancing. Isn’t it easier (if you are still investing) to just add money so that your portfolio stays balanced, instead of selling and buying?

Just buy whatever is lower?

I know this only applies to the people who haven’t retired.

Dylan
Dylan
11 years ago

On the investment minimums for index funds, there are several reasonable, diversified options from places like Fidelity or Vanguard. If you don’t yet have the couple thousand needed, save in a high yield direct online savings account until you do.

When you’re just starting out, you balance will be much more impacted by your own contributions than market returns. Your ideal allocation may not be available with only a few thousand dollars, but the difference in potential return percentages may only equate to a few dollars at that point.

John Clark
John Clark
11 years ago

How about the ultimate “Lazy Fund” either Vanguard or Fidelity’s Balanced Index funds… They keep the 60\40 split and do the re balancing for you. You just have to keep putting the money in. 🙂

CindyC
CindyC
11 years ago

I am definitely a lazy investor. I’ve been doing the 25% on 4 funds approach for the past 20 years and it’s proven very successful. As I near retirement age, though, I need to come up with another strategy.

J.D.
J.D.
11 years ago

@Waves (#21)
Yes, it is easier to rebalance by just adding money to the funds in which you’re short. If that works for you, then do it. It’s not feasible in all cases, though, so I like to think of rebalancing in general terms. There are several ways to do it. It’s just important that you get there somehow.

fern
fern
11 years ago

I’m also a fan of index funds, although it was only recently that i took concerted efforts to transform more of my total portfolio into more index funds.

this is a great comparison, but you’ve not indicated what age range these might be suitable for. If you’re in your 20s, you can afford to be much more aggressive on the stock end while if in your 50s, not so much.

Matthew
Matthew
11 years ago

As nice as it sounds to just dump money into these index funds, the companies in these indexes (Exxon, McDonalds, Starbucks, Shell, Novartis) have horrible effects on society. Should we really all rush out and put all of our investment money into these companies for the rest of our lives? If we do, I worry about the ramifications for the environment, our society, and our health. I recommend putting the effort in to find some investments that are good for the world and not just your retirement account. It can be tough (very few companies are 100% good) but there’s… Read more »

Erik @ ErikFolgate.com
Erik @ ErikFolgate.com
11 years ago

Thanks for these portfolios. My wife wants me to open her up a ROTH IRA, and I told her we should do it with Vanguard to get the best index funds. I have an IRA with sharebuilder and I use all ETF’s that follow similar indexes, but I have a little more risk built in for higher returns. She, however, is not a risk taker, so I think the “no-brainer” portfolio will be a good one for her.

Sara A.
Sara A.
11 years ago

What do you think of date targeted funds? They are usually named “retirement” funds, but there is nothing I’ve seen that indicates you can’t use it for a taxed account.

Ron A
Ron A
11 years ago

I’d like a post dedicated to emerging markets inside retirement portfolios.

Sharon
Sharon
11 years ago

Considering that my IRA is totally Fidelity Four-in-One, I’m interested to see what you decide to do with yours!

Kevin M
Kevin M
11 years ago

I need to think of a catchy name and start my own lazy portfolio. Those names are all pretty lame :).

Bayas2tcnj
Bayas2tcnj
11 years ago

There are also very nicely crafted ETFs for those who cant afford to get into a Vanguard Mutual Fund (I think minimum first investments is 3000). Check out iShares S&P Moderate Allocation (AOM) TOP 10 HOLDINGS ( 99.91% OF TOTAL ASSETS) Company % Assets iShares Barclays Aggregate Bond 25.39 iShares Barclays Short Treasury Bond 23.32 iShares Barclays TIPS Bond 11.92 iShares Cohen & Steers Realty Majors 2.91 iShares MSCI EAFE Index 11.46 iShares MSCI Emerging Markets Index 1.24 iShares S&P 500 Index 18.3 iShares S&P MidCap 400 Index 3.24 iShares S&P SmallCap 600 Index 2.13 They even have target date… Read more »

dan
dan
11 years ago

Watch out for FFNOX, the fee is a little larger than just having the individual index funds, not much but non-zero. You are basically paying them to rebalance for you.

MITBeta @ Don't Feed the Alligators
MITBeta @ Don't Feed the Alligators
11 years ago

I like the idea of Lazy Portfolios. The problem I have with all of these, however, is that asset allocation doesn’t change as your time horizon changes.

A young person who invests in the “Couch Potato” portfolio will not generate the kind of returns he will need to retire someday. Conversely, a retired person will likely be overexposed with the same portfolio.

If your Target Retirement Fund of choice doesn’t suit you, at least consider modifying the above portfolios to be more age appropriate.

Tyler@Frugally Green
11 years ago

I’d like to see some of these guys chime in on adding a green fund to their portfolios. I’m working to diversify my holdings right now and am writing about which strategies and funds I’ve been researching. There are a lot of options out there from the very small and specific to the the very broad and diversified. I think this will be a good industry to add for those that like to diversify with industry specific funds.

Jason
Jason
11 years ago

Why don’t folks just go with Vanguard target retirement funds? My retirement money is stashed there. Appropriate domestic/international/bond mix that rebalances for you over time. People make things way too complicated. Since I’ve switched, I haven’t thought about my investments since.

S Patel
S Patel
11 years ago

This may be a stupid question, however I’d like to know if there is a difference in buying it from Vanguard as opposed to sharebuilder or etrade etc? I know there is the brokerage cost, however do you also pay something like that when you setup an account with Vanguard? Or, is it out of convenience and having your investments in one place (etrade, sharebuilder etc)? Thanks!

Ibrahim | ZenCollegeLife.com
Ibrahim | ZenCollegeLife.com
11 years ago

This is an interesting idea, tried and true lazy portfolios. I think building on ideas that have been shown to work is the key to innovative success. Great Job.

Chett
Chett
11 years ago

Okay J.D. you know why I keep coming back to visit this site? The readers here are intelligent and think for themselves, and if they disagree with you, or believe your infomation to be lacking they tell you, and most of them will offer information to back up their argument. (Example #6, #12, and #27.) Some other sites I check out with large followings seem to have a cult like following with a bunch of sycophants who murmur in unison agreeing to everything that is said, with no dessention as if the words of the blogger are gospel. Great posts… Read more »

Maggie
Maggie
11 years ago

Nice collection of funds. I notice the heavy focus on index funds and I’ve seen that around the web a lot lately. While the idea of index funds does appeal to me, all this agreement makes me a little antsy. Do you know of any writers you like who don’t believe in investing in index funds as a strategy? I’d like to read some opposing opinions before I jump in with both feet.

DG
DG
11 years ago

All ETFs. I’m in my mid-20s so my bond to stock allocation is aggressive at the moment. 20% BND – Vanguard Total Bond Market 20% VTI – Vanguard Total Stock Market 10% VGK – Vanguard European 10% VNQ – Vanguard REIT 10% VB – Vanguard Small-Cap 10% VO – Vanguard Mid-Cap 10% VPL – Vanguard Pacific 10% VWO – Vanguard Emerging Markets At some point I may replace the Total Stock Market with the Vanguard 500. I prefer the ETFs for easier tracking / trading. And with certain brokerages the transaction fees are lower (e.g. Schwab). The lazy portfolio works… Read more »

sandi_k
sandi_k
11 years ago

J.D, thanks so much for including the Fidelity option – all of my retirement funds are with Fidelity, and we had never seen a “lazy portfolio” specific to them.

I’ve printed it out, and will be re-assessing soon. I have way too much of my $$ in cash right now.

J.D.
J.D.
11 years ago

@sandi_k (#43)
You might want to borrow that “Lazy Person’s Guide to Investing” from the library. It offers some Fidelity-based lazy portfolios…

E
E
11 years ago

I am definitely a lazy investor. My 401k is in targeted risk funds – half “aggressive” and half “growth”. It rebalances automatically every quarter. I’m considering opening a Roth IRA with T Rowe Price’s target date fund. I have a regular IRA which I opened at 25 to roll over my 401k from my first job, and haven’t touched it since – except to roll over my 401k from my 2nd job. It’s in a few funds – one large cap, one small-mid, and one international – but I don’t know which ones they are or how they stack up.… Read more »

kick_push
kick_push
11 years ago

target funds FTLW (for the lazy win lol)

Dave Shafer
Dave Shafer
11 years ago

The #1 problem with passive [lazy] investing is that most people haven’t taught themselves to deal with bear markets. It’s hard to have confidence in an investing style that is called “lazy!” The data [Dalbar Inc., Vanguard, etc.] all point out the same effect. People pull out massive amounts of $$ during a bear market effectively selling low after buying high. This holds true whether it is an active or indexed mutual fund! I’m sure many of those folks told themselves they could withstand seeing their stock portfolio going down 20-30-40%, but in the end couldn’t! Now on the plus… Read more »

Lisa
Lisa
11 years ago

This is a great list, thank you very much, J.D. Just reading your posts about funds and comparing them to my 403B options through Prudential made me realize that my fund choices through work doesn’t include even one Index Fund. No Vanguard at all. Some Fidelity funds, but only target funds that have fees of 1.25% and higher. What a rip off. I complained to HR, but it seems somebody on the board picked these funds. I tried to opt out of my 403 B account and go with TIAA-CREF, but the TIAA CREF account reps say you can’t do… Read more »

Jeff
Jeff
11 years ago

Or in other words…diversify!

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