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.[note 1]
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. Note that while the "% allocation" is different from those listed below, these funds typically make up the core of Vanguard's Target Retirement and Lifestrategy funds.[note 2]Expense ratios are shown in parentheses.
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
As proposed by Rick Ferri on the Bogleheads® forum, the Core Four are four funds which form the "cornerstone" of a portfolio. Low-cost, total market fund examples are shown below (with expense ratios in parantheses).
Rick proposes that investors first determine their bond allocation. With the remaining funds, allocate 50% to US stock, 40% to international and 10% to REIT. For example, for 60/40 and 80/20 portfolios, you would end up with the following :
Core Four Portfolio, Asset Allocations
Desired Stock/Bond Allocation
Total US Stock Market Index Fund
Total International Stock Index Fund
Total Bond Market Index Fund
REIT Index Fund
60 / 40
80 / 20
Rick stresses that the exact allocation percentages aren't important, to the nearest 5% is fine.
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 a total market 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.[note 8]
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.
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.[note 10]
Forum members Craig Rowland and J. M. Lawson have written a book, 'The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy, detailing every aspect of the Permanent Portfolio.
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.
↑Taylor Larimore was an early advocate of this approach, which he described in 1999 in a Morningstar posting, Which is better, 15 funds or 4?. The fourth fund is a money market fund used for cash management. The allocation percentages of the portfolio should be tailored to each investor’s time-frame, risk tolerance and personal financial situation. Discussed in Bogleheads® forum topic: The Three-Fund Portfolio, Taylore Larimore. January 01, 2012.
↑ 4.04.14.24.3Schwab's International Index Fund (SWISX) tracks the MSCI EAFE index, which does not include emerging market stocks, Canadian stocks, and international small-cap stocks.
↑ 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."