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Many investors, both new and seasoned, think they have to spend every waking hour following their investments in order to retire wealthy.

However, there are a few reasons that hands-off investors, otherwise known as "indexers," may have the upper hand when it comes to investing for retirement.

  • In the long term, index funds perform just as well as managed funds, if not better.
  • Compared to index funds, managed funds can cost investors huge amounts of money over time. Frequent trading incurs additional fees.
  • You only need some basic knowledge to make good choices that yield excellent returns in the long run.

That is good news for your average investor. According to a study conducted by the Employee Benefit Research Institute, the average American investor spends more time planning a vacation than he or she does for retirement. Therefore it's fair to assume that a low-maintenance portfolio would be an excellent choice for investors who are simply not interested in spending a lot of time maintaining retirement accounts.

Assembling your lazy portfolio
The good news is that you can do just as well, and often better, than active investors with just three ETFs in your portfolio.

Source: Flickr user Alex Proimos.

A total U.S. stock market index ETF is a good starting point. For example, Vanguard Total Stock Market ETF (NYSEMKT: VTI  ) gives you 98% U.S. stock market exposure, with a very small percentage allocated to international stocks and cash. This fund offers a nice balance of large-cap (72%), mid-cap (19%), and small-cap (9%) stocks. The expense ratio is extremely low at 0.05%, and this highly liquid fund rarely trades with a bid/ask spread of more than $0.02. This means that less-experienced investors are protected from being burned on fees or other expenses associated with trading ETFs.

An international fund is a good choice for your second fund purchase. One of the easiest ways to assemble a lazy portfolio is to stick to a single fund family, such as Vanguard, iShares, or Schwab, but it is perfectly acceptable to mix and match fund families according to your needs. Vanguard Total International Stock ETF (NASDAQ: VXUS  ) pairs nicely with the U.S.-focused ETF because there is little overlap between holdings. The Total International Stock ETF holds almost exclusively international stock funds, making it easier to balance a portfolio. International funds can be quite expensive, but this fund is a steal with a 0.16% expense ratio.

Investors should always be aware of the asset allocation of each ETF they hold. For example, Vanguard Total World Stock Index (NYSEMKT: VT  ) is another excellent ETF that holds international stocks and can complement the Vanguard Total Stock Market ETF nicely. However, investors should be aware that this fund holds approximately 50% international stocks and about 48% domestic stocks, as compared with the 100% international exposure of the Vanguard Total International Stock ETF. While the total-world ETF is a good way to gain international stock exposure, it's more complicated to rebalance in conjunction with other funds, however. Funds exclusively invested in a single asset class are easier to rebalance -- and after all, ease is what we're aiming for.

For the laziest investors, two funds can suffice. However, a third fund can help investors control risk depending on how many years they have until retirement. Investors 20 or more years from retirement should be comfortable with 100% stock exposure. Investors closer to retirement may want to consider adding a bond ETF, such as Vanguard Total Bond Market (NYSEMKT: BND  ) . This bond ETF is another fund that is nearly 100% invested in its asset class, which will simplify rebalancing. With a 0.1% expense ratio, this fund gives investors access to the entire bond market with little effort or expense.

A little effort goes a long way
Once assembled, a lazy portfolio requires very little maintenance. If you can muster just a little bit more effort, however, these two tips will help you achieve your goals:

  1. Rebalance once a year. Over time, certain asset classes will outperform others. Once a year, assess your asset allocation and risk tolerance, and buy and sell to stay within a few percentage points of that goal. If you never rebalance, your asset allocation will become skewed over time.
  2. Occasionally check your funds to make sure fees, expenses, and asset allocation are still acceptable. Sometimes funds will begin tracking a different index. Shop around once a year to see if a better product is available.

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Read/Post Comments (13) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 06, 2014, at 12:01 PM, DEVO wrote:

    There is huge overlap between VT and VTI-- a lot of the same US stocks are in both funds.

  • Report this Comment On February 06, 2014, at 2:11 PM, Scottilla wrote:

    Watch the expense ratios on these ETFs. I bought a reverse gold ETF 4 years ago with a supposed 1.75% expense ratio. Now, 4 years later, the price of gold is about the same while the value of the fund has declined 25%. Unless the 1.75% expense ratio is a lie, I don't understand how this is possible.

  • Report this Comment On February 06, 2014, at 2:22 PM, drcf wrote:

    Would I have to pay expense fees if I bought the ETF stock on the open market and traded it as a regular stock?

  • Report this Comment On February 06, 2014, at 2:58 PM, daytrader9 wrote:

    These will be fantastic after the next major pullback. Until then, day trade these devices.

  • Report this Comment On February 06, 2014, at 4:21 PM, tpretlow wrote:

    It's time to go to cash and put it into a non-dollar denominated currency basket right now. The sooner the better.

  • Report this Comment On February 06, 2014, at 5:12 PM, plange01 wrote:

    retire rich with 3 etf's and the $10 million you put in them! if five years you will be worth close to a astounding $4 MILLION!

  • Report this Comment On February 06, 2014, at 5:18 PM, vcmg wrote:

    The concept of someone being able to retire "rich" using only three ETFs with no other assistance is laughable. These types of articles encourage people with no financial background to think they are educated about financial matters. No doubt, many readers, including many of those commenting herein, are capable of going solo. Most people are not.

  • Report this Comment On February 07, 2014, at 12:13 AM, fredjohnson55343 wrote:

    Hmm, this author just listed my entire portfolio. VTI, VXUS and Vanguard Tot Bond Fund. I have $4 million in them.

  • Report this Comment On February 08, 2014, at 10:06 AM, reddevil wrote:

    Wow- I pity the people who use this type of dubious "advice" as their primary source of investment guidance.

    It's not simple.

    The "average" investor needs much more than just "a little knowledge" to accumulate a large net worth.

    How about important investment traits like patience, fortitude and courage ?

    Like most things in life you get what you pay for.

  • Report this Comment On February 11, 2014, at 2:21 PM, louren wrote:

    I don't know why everyone is recommending Vanguard Total Intl Stock ETF or Index fund. When I look them up on Morningside, the ETF has a 2 star rating, with below average returns for average risk. And a short record. The index funds went from a 3 star to 2 star for the past 3 years, with high risk vs. avg returns. I have been looking all afternoon for an international total index fund that has lower risk (at least avg risk), with at least avg returns, has a decent rating by Morningstar, and has lower than average expense ratio. Not having much luck, but afraid to take the chance on Vanguard Total International Index fund

  • Report this Comment On February 23, 2014, at 10:44 AM, abc124 wrote:

    Indexing works. Plain and simple. You all just can't believe it's that simple probably because you make your living ripping clients off with front loaded, 12b fees, commission laden funds, and whole life insurance. And Morningstars ratings don't mean sh!t.

  • Report this Comment On November 18, 2014, at 6:33 PM, MorikTheMad wrote:

    To make this sound advice for novice investors, just add (For your retirement account at least):

    - Don't take out any money until you retire (aside from rebalancing).

    - In fact, add money annually via 401k, additional after-tax (to the I.R.C. Section 415(c) limit), IRA, or taxable accounts (in roughly that order)

    If you get scared easily and would be tempted to take the money out of the market, allocate more to bonds. Anywhere from 10% to 50%+ bonds depending on your age (until you retire; after that a bit more, maybe 60-80%).

    If you can keep yourself from freaking out and selling your stock when the market crashes several times between now and retirement, 100% stock when you are young, going into a bit of bonds as you age. Or more bonds to your comfort level.

    Really the important thing is to not freak out and sell everything when the market goes bad for a while, and to keep putting money in.

  • Report this Comment On January 04, 2015, at 1:22 PM, chrisreid8 wrote:

    Wow, I dunno how this person is providing financial advise. I put these ETFS into to create a portfolio, and no matter how I weigh the different ETFs, it constantly underperforms the S&P 500.

    Seriously what poor advice!

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Melinda Melendez

Melinda Melendez is a writer and editor from Tallahassee, FL.

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