How to build a lazy portfolio

Investors are often challenged to select funds from a long list of unfamiliar names. For example, selecting funds for an employer's retirement plan when starting a new job.

Alternatively, an investor may know which funds to utilize, but does not understand how to assign the percentage contribution for each fund in the portfolio (see below).

Whether an investor adheres to a philosophy of investing in the total market using a minimum number of funds, or pursues a more advanced strategy of multi-factor investing, we will use a straight-forward approach to create what's known as a lazy portfolio.

Select your asset allocation
The first step when starting an investment program is to choose your asset allocation. Be sure to consider this in the context of your entire portfolio. When beginning participation in an employer's retirement plan, this means incorporating both the plan investments and your existing investments in your overall allocations.

Analyze the fund list
A general checklist when examining fund options:


 * For each item in the fund list, find the available asset class exposure that the funds provide and their expense ratios. This information can usually be found in the fund's fact sheets.


 * The general total market approach is to look for the major categories, such as US stock, international stock, US bonds, and international bonds. Fixed income (cash reserves) counts as bonds; company stock funds count as stock. Some bond funds may be listed as "inflation protected."


 * Investors desiring to create multi-factor portfolios will want to find funds that provide exposure to small cap and value stocks in both US and international markets.


 * For asset allocations, it's only necessary to get the percentages to the nearest 5 %.

Target date retirement funds
The default option for employer provider plans is to place your contributions and employer matches into a target date retirement fund. If the process of selecting funds is too complicated, then staying with a target date retirement fund may be entirely suitable for you. Select the fund which matches your desired asset allocation.

However, many retirement date funds use actively managed funds. If these funds are available at a modest expense ratio, this may be a satisfactory option.

An advantage of tax-deferred accounts is that you can transfer among the different funds without paying taxes on the gains. In other words, you are not stuck with this decision. There is no penalty for changing your mind later. If you feel more confident about lowering your expenses by going to separate low-cost funds at a later time, you are free to do so.

Select the funds
The first step in fund selection is to look for choices that have the word "index" in them, such the "SSgA S&P 500 Index" fund or "SSgA US Bond Index" (US Bonds) or "SSgA Glob Equity Ex US Index" (international stocks). These funds will generally be your lowest cost funds.

An actively managed fund ("index" is not in the fund name) will generally have higher costs than an equivalent index fund.

Next, identify which funds cover a broad category, such as US stocks or US investment grade intermediate bonds. For example: "Dodge & Cox International Stk" (international stock). International stocks can be identified by "ex US" or "international" in the name. There may be an alphabet soup of acronyms here, such as MSCI EAFE. The asset allocation information will tell you what this fund is for, i.e. international stock.

If multiple diversified stock fund choices are available for the same asset class, pick the lowest cost fund.

Select the highest grade bond funds.

Understand that adding funds adds complexity to your portfolio. The approach depends on your level of comfort to manage these funds.

U.S. stocks
If you are a total market investor you may not be able to approximate the total stock market with the available choices, but do the best you can. An S&P 500 index fund should be adequate on its own if you can't find (or don't want the added complexity of) small-cap and mid-cap funds.

A completion index fund can be used to complement an S&P 500 fund. These two funds will provide exposure to the total US stock market.

A multi-factor investor may not have small cap and value index funds in the employer provided plan. The investor may need to place these allocations in personal retirement plans or taxable accounts.

Select the allocation percentages
Now that the funds have been identified, determine how much of a percentage to assign to each fund.

Target date retirement funds are nothing more than lazy portfolios managed by investment professionals. Your decision is to simply align your desired asset allocations with the appropriate target retirement fund.

For example, if you are a total market investor and would like an asset allocation of 60% stocks / 40% bonds and using Vanguard's target retirement funds list as a guide, the Vanguard Target Retirement 2020 Fund (VTWNX) is fairly close to what you are looking for. Under Portfolio and Management:


 * {| class=wikitable style="text-align:left"

! Ranking by Percentage !! Fund !! Percentage !! Round to the nearest 5%
 * + Vanguard Target Retirement 2020 Fund (VTWNX) Asset Allocation as of 08/31/2013
 * 1 ||Vanguard Total Stock Market Index Fund Investor Shares (US Stocks) ||43.6% ||40%
 * 2 ||Vanguard Total Bond Market II Index Fund Investor Shares (US Bonds) || 30.3%|| 30%
 * 3 ||Vanguard Total International Stock Index Fund Investor Shares (International Stocks) ||18.5% || 20%
 * 4 ||Vanguard Total International Bond Index Fund Investor Shares (International Bonds) || 7.6% ||10%
 * Total|| —||100.0% ||100%
 * }
 * 4 ||Vanguard Total International Bond Index Fund Investor Shares (International Bonds) || 7.6% ||10%
 * Total|| —||100.0% ||100%
 * }
 * Total|| —||100.0% ||100%
 * }


 * 60% Stocks = 40% US Stocks + 20% International Stocks
 * 40% Bonds = 30% US Bonds + 10% International Bonds

If you don't have international bonds, just combine it with the total bonds.

Replace the Vanguard fund names with your selections (rounded to the nearest 5%) and your lazy portfolio is complete.

Inflation-protected securities
Bond funds identified as inflation-protected, like TIPS, are somewhat different than a conventional bond fund. Their purpose is to help diversify your portfolio further by providing some protection against inflation.

One Boglehead approach is to add inflation-protected securities to the bond portion of your portfolio, perhaps up to 50% of the bond allocation. The choice is arbitrary - from not using any inflation-protected fund up to 50% (or more). The decision is based on a level of comfort (can you sleep well at night) rather than one based on theory.

Multiple accounts
If you are married, a frequently encountered situation is that the investment portfolio is allocated to a multiplicity of accounts. For example, a husband and wife may both have employer provider plans, both have personal retirement plans, both have taxable accounts. This equals six accounts. For guidance on handling these more complex scenarios, see Asset allocation in multiple accounts.