The Lazy Portfolio | Why A Simple 3 Fund Portfolio Might Be Best
Is it possible to get top-tier financial returns without a lot of effort? Turns out that research shows it’s not only possible but, in the vast majority of cases, a simple passively managed portfolio CRUSHES a more complex actively managed portfolio. Meet “the lazy portfolio” aka “the 3 fund portfolio” aka “couch potato investing“. Whatever name you want to call this portfolio or investing style it’s definitely something you’ll want to have on your radar.
Warren Buffett’s “Lazy” Bet
Fun story: In 2008 Warren Buffett offered up a million dollar bet that the 10 year returns of the S&P 500 (i.e. a passive investment anyone can buy) would beat the returns of a hedge fund (i.e. fancy stock pickers, quants, and the “smartest guys in the room”). One such hedge fund felt confident enough to take the bet and guess how it ended? It ended badly. Very badly.
What did Buffett do? Buffett picked the S&P 500 and it returned 127%. The hedge funds returned 36%. Let me say it again: for his winning investment Buffett picked the S&P 500 which is a low-cost index fund that anyone can easily purchase. So simple! The hedge fund manager got absolutely destroyed by Buffett’s lazy portfolio strategy! And the data shows that this isn’t some aberration; passive management or index fund investing outpaces active management returns in the vast majority of cases.
Lazy works when it comes to investing
The Buffett story illustrates that you don’t need to be a Wall Street genius to do well in the stock market. You can simply invest in low-fee index funds and then wait. Construct this lazy portfolio and you’ll outperform 80%+ of the mutual funds, hedge funds, or the thrill seekers on Wall Street Bets. It’s boring but it works.
The beauty of the lazy portfolio lies in it’s simplicity.
One of my big goals this year was to simplify my life. I don’t know about you, but I find that it’s really easy to get bogged down unnecessary stuff. All that extra stuff made my life more complicated and stressful and eventually I said enough is enough! A lot of the steps I took when simplifying my life related to our families financial life including implementing the lazy portfolio.
My “simplify my life” tasks:
- 💳 Closed multiple credit cards
- 💰 Consolidated bank accounts
- 💻 Consolidated investment platforms
- 🏡 Marie Kondo’ed our house and donated carloads of unnecessary stuff we’d accumulated over the years
- ✉️ Unsubscribed from as many as emails as possible
- 📈 Implemented the 3 fund portfolio (i.e the lazy portfolio)
How does it feel to simply your financial life? It feels great!!! Ahh exhale!
What is the lazy portfolio?
The lazy portfolio is:
- Grounded in index funds
- Passively managed
- Low on fees
- Accessible to everyone
The lazy portfolio is NOT:
- Based on a particular strategy or niche
- Actively managed by a well-paid fund manager
- High on fees
- Concentrated to only a few companies or industries
- Accessible to only the wealthy or well connected
So what does a lazy portfolio look like? Let’s take a look at some examples for my fellow couch potato investors.
Lazy portfolio examples
Bogleheads 3 Fund Portfolio
- 60% Vanguard Total Stock Market ETF ($VTI)
- 30% Vanguard International Total Stock Market ETF ($VXUS)
- 10% Vanguard Total Bond Fund ETF ($BND)
Note: This is just an example asset allocation that is common for people age 40 and below. Investors over age 40 likely would want to increase their BND position and decrease VTI and VXUS.
Rick Ferri’s Lazy 3 Fund Portfolio
- 40% Vanguard Total Stock Market ETF ($VTI)
- 40% Vanguard International Total Stock Market ETF ($VXUS)
- 20% Vanguard Total Bond Fund ETF ($BND)
You can see this is very similar to the Bogleheads portfolio but equal weights US and International and tips more heavily toward bonds.
Scott Burns’ Couch Potato Portfolio
- 34% Vanguard Total Stock Market ETF ($VTI)
- 33% Vanguard International Total Stock Market ETF ($VXUS)
- 33% Vanguard Inflation-Protected Securities Fund ($VIPSX)
Notice something in common with our lazy portfolio examples?
- Vanguard: All three are comprised of Vanguard funds. Why? Vanguard has ultra-low fees and is the leader in the passively managed index fund space.
- 3 Fund Portfolio: Each of the three lazy portfolios are very simple and contain only three funds.
- Asset Allocation: The lazy portfolios are all tipped towards equities. Depending on your age you can tweak your allocation; if you’re closer to retirement you’ll likely want to increase your allocation of bonds and decrease stocks.
Why is the lazy portfolio a smart choice?
The simple fact is the lazy portfolio has proven time and time again to beat more complicated investment strategies.
- Proven Results: From Morningstar: In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons. As shown on the chart below, only 23% of all active funds surpassed the average of their passive rivals over the 10-year period ended June 2019.
- Set it and forget it: You literally could go multiple years without checking in on your lazy portfolio performance.
- Low fees: Hedge funds often charge a whopping 2% management fee plus 20% of profits. The fees are paid by you and majorly eat into investment returns. Want to know what management fee Vanguards S&P fund charges? 0.03%!
- Simple: As with many things in life, simple is beautiful. The lazy portfolio is easy to explain and understand. Why do something with greater complexity only to get inferior financial returns?
- Accessible to Everyone: Many hedge funds are only available to the wealthy or well-connected. Anyone can open up a brokerage account and implement the three fund portfolio. You don’t need to be a pro or have a lot of money.
Let’s get lazy! Passive funds continue to soar
Perhaps the single biggest shift in the financial markets over the past decade has been the shift from ‘active’ to ‘passive’ management. On the graphic below you can see money flowing out of actively managed funds (the purple bar) and into passively managed funds. Investors aren’t stupid. If we can get better returns and lower fees then we’ll be happy to switch from active to passive.
Just to make sure we’re on the same page I want take a quick sec to fully explain what I mean by active and passive:
Active Management 👎
Think of active management as having a professional manager pick the “best” stocks. This professional manager may have impeccable credentials like a MBA from a top school, a big office in Manhattan, and a general aura of financial genius. The manager and his mutual fund will take your money and carefully pick the best a professionally managed mutual fund. They do this for a fee of course.
Passive Management 👍
In a passively managed fund an investor owns an entire basket of stocks. There is no manager to select the “best” ones. For instance, one of the most popular passive funds Vanguard’s S&P 500 index fund. An index fund is a passively managed fund that tracks a particular index (in this case the S&P 500).
Couch Potato Investing Benefits 🥔
Hopefully by now you can see the benefits of building a lazy portfolio. To close let’s summarize the lazy portfolio aka couch potato investing benefits.
- Lower fees: High fees are bad. With couch potato investing you’re not helping make some fund manager rich in exchange for getting you sub-par returns!
- Less complexity in your life: Lazy investing is simple and eliminates unnecessary complexity in your life allowing you more time and energy to focus on the things that matter.
- Higher financial returns: Remember the Buffet bet? Time and time again research shows active managers can’t consistently beat passive management. Much better to give yourself a high likelihood at better financial returns with couch potato investing!
- Minimal time spent fussing with your investments: The lazy portfolio can be a set it and forget it strategy.
New to investing? Here’s a few other good resources ✔️
- Brokerage Accounts: We love Vanguard for brokerage accounts. A lot of younger people prefer the easy interference of Betterment or Wealthfront. All are good options. Read our Betterment vs Wealthfront recap here.
- 7 Proven Ways to Become Rich: Hint… make money and then invest it! Read more here.
- How to invest $10k: If you don’t have many investments a simple index fund or life cycle fund is probably your best bet. Either way read our article here for ideas on how to invest $10k.
Did you switch to a lazy portfolio? Let us know in the comments!
Hi there. What do make of the claims made by the Motley Fool that those subscribed to their paid stock picking services can and actually do outperform the market (back tested to 2002) by several fold? Their case is that only a few stocks drive the majority of the returns of the overall stockmarket – and through fundamental analysis if you can create a 30-50 stock high conviction portfolio – you do can outperform. Thoughts?
Thanks for the comment. I’d be very skeptical of that claim. Over the long term very few stock pickers or fund managers can beat the market. It’s just extraordinarily difficult. Motley Fool’s whole business model essentially disappears if they just say ‘buy an index fund’ so they have incentive to say stock picking can work.
Thanks Paul – yes that does seem to make sense to me now after experimenting with their service for a relatively short period.