Lazy portfolios are designed to perform well in most market conditions. Most contain a small number of low-cost funds that are easy to rebalance. They are "lazy" in that the investor can maintain the same asset allocation for an extended period of time, as they generally contain 30-40% bonds, suitable for most pre-retirement investors.
- 1 Two fund portfolio
- 2 Three fund lazy portfolios
- 3 Core four portfolios
- 4 More lazy portfolios
- 5 Permanent Portfolio
- 6 Canadian versions of lazy portfolios
- 7 Notes
- 8 See also
- 9 References
- 10 External links
Two fund portfolio
It is possible to retain access to the broad US and International markets, as well as bonds, using only two funds. Rick Ferri has proposed a two-fund portfolio containing the total world stock market, and a diversified US bond market index fund as follows .
|% Allocation||Fund||Mutual Fund||ETF Fund (ER)|
|Investor's (ER)||Admiral's (ER)|
|40%||Vanguard Total Bond Market Index Fund||VBMFX (.20%)||VBTLX (.08%)||BND (.08%)|
|60%||Vanguard Total World Stock Index Fund||VTWSX (.30%)||-||VT (.18%)|
Three fund lazy portfolios
There are a number of popular authors and columnists who have suggested 3 fund lazy portfolios. These typically consist of three equal parts of bonds (total bond market or TIPS), total US market and total international market.
In addition, consider that there are several close alternatives to these funds, especially when purchasing through vanguard. For example, consider that the "Vanguard Inflation-Protected Securities Fund" also has a short term alternative, "Vanguard Short-Term Inflation-Protected Securities Index Fund" (tickers VTIPX or VTAPX) which can offer slightly less volatility in NAV.
Core four portfolios
|Fund||Mutual Fund||ETF Fund (ER)|
|Investor's (ER)||Admiral's (ER)|
|Vanguard Total Bond Market Index Fund||VBMFX (.20%)||VBTLX (.08%)||BND (.08%)|
|Vanguard Total Stock Market Index Fund||VTSMX (.17%)||VTSAX (.05%)||VTI (.05%)|
|Vanguard Total International Stock Index Fund||VGTSX (.22%)||VTIAX (.14%)||VXUS (.14%)|
|Vanguard REIT Index Fund||VGSIX (.24%)||VGSLX (.10%)||VNQ (.10%)|
Rick proposes that investors first determine their bond allocation. With the remaining funds, allocate 60% to US stock, 30% to international and 10% to REIT. For example, for 60/40 and 80/20 portfolios, you would end up with the following :
Rick stresses that the exact numbers aren't important. For the 60/40 portfolio, you could increase Vanguard REIT Index Fund to 10%, drop Vanguard Total Stock Market Index Fund to 35% and the Vanguard Total International Stock Index Fund to 15% if you like round numbers.
The core-four is just a low cost foundation for your portfolio. You could add a slice of value stocks (US and/or International). You could split the bond portion between Treasury Inflation Protected Securities and nominal bonds, which would result in a slightly more conservative version of David Swensen's model portfolio (less international stock and less REIT, but otherwise the same four base funds plus TIPS.
More lazy portfolios
Beyond the simple 3- and 4-fund lazy portfolios are more complex portfolios. These are still "lazy" in that they contain enough bonds (typically 30-40%) to allow the investor to maintain the same AA for much of the accumulation phase of their lives. The more complex funds add REITs, and 'slice and dice' the US and/or International stocks, adding large and small value to the mix. It is worth noting that in some of the cases outlined below, a simpler portfolio may be able to accomplish similar goals. For example, a small and value tilt away from the market may be accomplished by adding a small cap value fund, thus 'tilting' from a total stock market fund.
Bill Schultheis's "Coffeehouse" portfolio
This simple 7-fund portfolio was made popular by Bill Schultheis' book The Coffeehouse Investor. He advocates 40% in an intermediate term bond fund and 10% each in various stock funds. More information can be found at The Coffeehouse Investor. The Coffeehouse Portfolio contains only 10% international stocks (17% of total equities). It slices up the domestic portion, but uses a total international fund.
William Bernstein's "Coward's" portfolio
William Bernstein is the author of several books including The Intelligent Asset Allocator and The Four Pillars of Investing. He introduced the Coward's Portfolio in 1996. The "coward" refers not to the investor's risk tolerance but to the strategy of hedging one's bets and having slices of a number of asset classes. This portfolio is similar to the Coffeehouse Portfolio except that short term bonds are used, and the international portion is divided into equal slices of Europe, Pacific and Emerging markets.
Frank Armstrong's "Ideal Index" portfolio
Frank Armstrong, author of The Informed Investor, proposed this portfolio for an MSN Money article. It contains a smaller allocation to bonds, and a much larger allocation to international stocks (in fact the equities, excluding REIT, are split 50/50 between domestic and international). Like Bernstein he advocates short term bonds. If the domestic slices were replaced by a total market fund, this portfolio would be very close to the 3-Fund portfolios, with a slice of REIT added.
David Swensen's lazy portfolio
David Swensen is CIO of Yale University and author of Unconventional Success. His lazy portfolio uses low-cost, tax-efficient total market funds, a healthy dose of real estate, and inflation-protected securities (TIPS).
The Permanent Portfolio was devised by free-market investment analyst Harry Browne in the 1980s as a buy-and-hold portfolio that contains a healthy allocation to gold. The portfolio holds equal allocations of domestic stocks, gold, short-term treasury bonds, and long term treasury bonds.
The portfolio can be implemented with an investment in a low cost US total stock market index fund, along with direct investments in gold bullion coins, US treasury bills, and US treasury bonds. It can also be implemented with low-cost exchange-traded funds. See Blackrock iShares for an ETF version of the portfolio.
Canadian versions of lazy portfolios
Below are a few examples of lazy portfolios (also called simple portfolios) that can be utilized by Canadian domiciled investors.
|The three-ETF portfolio is recommended for its simplicity and diversification.|
Three-ETF portfolios consist of Canadian bonds, Canadian stocks and global stocks. Here we show an example using TSX-traded ETFs from Vanguard Canada:
Suitable alternatives from other vendors for two of the three ETFs in the table above are mentioned in the following pages: Canadian bonds and Canadian equities. For global stocks, VXC currently has few competitors on the TSX. There are US-listed options for the global equity ETF, such as VT, but they include a small percentage (3-4%) of Canadian equities.
This 3-fund portfolio may appear overly simplistic. Certainly the brokerage statements will look very boring. Yet this portfolio has the following characteristics:
- Exposure to over 500 Canadian bonds (terms of 1 to over 25 years; credit ratings covering the full investment grade spectrum, include government and corporate bonds)
- Exposure to nearly 250 Canadian stocks covering large-, mid- and small-capitalizations
- Exposure to thousands of large- and mid-capitalization stocks from other developed and emerging markets
- Will be very easy to rebalance
- Weighted average management fee of 0.14% (December 2014), full MER will be a few basis points higher
- No currency exchange fees for ETF transactions using Canadian dollars
- No currency hedging of global equities
Model portfolios maintained by Canadian Couch Potato use the same three ETFs as in the example above, with a range of fixed income from 10 to 70% of the portfolio. For equities, his Canadian:Global mix is 1:2 instead of 1:1.
Four index funds
|The four index fund portfolio is recommended for investors not wishing to open a brokerage account.|
Simple index portfolios with four index funds include Canadian equities, US equities, EAFE Equities, and Canadian bonds. The following table is an example of a simple index portfolio built with "FPX Balanced" allocations, using four TD e-funds as a example of low-cost index mutual funds:
Further discussion of this example is found in Building a portfolio, including links to index mutual funds from other vendors.
Model portfolios maintained by Canadian Couch Potato use the same four index funds as in the example above, with a range of fixed income from 10 to 70% of the portfolio. For equities, his Canadian:US:International mix is 1:1:1. The model with 40% bonds is traditionally known as the Global Couch Potato portfolio from MoneySense
Simple index portfolios with four ETFs include Canadian equities; US equities; EAFE Equities; and Canadian bonds. Sticking with our 50:50 mix of equities and fixed income, using the FPX Balanced index to allocate equities, and using BMO etfs for illustration purposes, we get:
- See Three-fund_portfolio for more information on 3-fund portfolios.
- Rick has stated that "The mix between U.S. stocks and international stocks can be changed to suit your preference for dollar exposure. Another option is to swap the total bond market index fund for an investment-grade corporate bond index fund that provides higher yield or a Treasury Inflation Protected (TIPs) fund the provides inflation protection."
- How to build a lazy portfolio
- Three-fund portfolio
- Vanguard four fund portfolio
- Vanguard target retirement funds
- Vanguard LifeStrategy funds
- Three Simple Index Fund Portfolios
- Kirk Report: Bill Schultheis' Coffeehouse Portfolios (2/13/2007) (Web site redesigned; link now requires paid membership.)
- Couch Potato Cookbook
- Permanent Portfolio - Early Retirement Extreme Wiki
- Re: Simple Portfolios 2014, Financial Wisdom Forum discussion.
- Duncan Hood and Ian McGugan, MoneySense, Couch Potato Portfolio: Introduction, April 5th, 2006, viewed December 31, 2014
- Duncan Hood and Ian McGugan, MoneySense, Couch Potato Portfolio: Meet the potato family, April 5th, 2006, viewed December 31, 2014
- Lazy Portfolios at MarketWatch - Comparative returns of numerous lazy portfolios compiled by Paul B. Farrell, lazy portfolios story archive, and discussion board.
- The Kirk Report - Comprehensive blog post about dozens of lazy portfolios. (Web site redesigned; link now requires paid membership.)
- Couch Potato Cookbook, from assetbuilder.com - A set of lazy portfolios containing from 2 to 10 funds.
- Monthly Self-Managed Couch Potato Portfolio Returns, from assetbuilder.com - Monthly returns for the Couch Potato portfolios.
- The Three Fund Portfolio, forum discussion
- Canadian Lazy Portfolios, Google Sheets source file for charts.