Hey, it's the holiday season. It's OK to be a little lazy, right?
Well, maybe in some ways. Eating too much turkey, watching too much TV, and being late to work the morning after the office party are one thing.
But when it comes to investing, although many people preach the benefits of "lazy" portfolios, you may actually be better off with a little unseasonal discipline.
What is a "lazy" portfolio?
The idea of a lazy portfolio is to help you invest in a broad range of stocks and bonds with the minimum amount of fuss.
So instead of reading all the financial news, fretting over which sectors are looking good right now, doing all the research, and deciding what and when you should buy, you let it all go and simply buy a handful of low-cost index funds.
Then what? Then you just forget about them. You hold on to those same few funds whether they're going up or down, whether the predictions are bullish or bearish. Don't pay any attention. Embrace laziness. At times when you could be earnestly leafing through The Wall Street Journal, go bowling instead.
Sounds good, right? Here's an example of what a lazy portfolio might look like, courtesy of investing author Rick Ferri:
- 40% Vanguard Total Bond Market ETF (NASDAQ:BND)
- 40% Vanguard Total Stock Market ETF (NYSEMKT:VTI)
- 20% Vanguard Total International Stock ETF (NASDAQ:VXUS)
There are plenty of other combinations of funds you could use. The idea is simply to get a broad exposure to the market using low-cost index funds.
What are the benefits of lazy portfolios?
Beating the market is notoriously difficult. Studies have found that even the well-paid pros struggle to do it consistently, so what chance does the average investor have? Many people end up "chasing performance" -- i.e., buying last year's hot stock too late and then selling it at the worst time. A lazy portfolio removes timing and judgment from the equation.
Lazy portfolios are also extremely low-cost ways of investing, assuming you choose your funds wisely. Index funds usually have lower expense ratios than actively managed funds, and by buying and holding for the long term, you avoid all the transaction costs of more active trading strategies.
When laziness becomes a bad thing
So far, so good -- passive investing has a lot to recommend it, particularly for novices. But it's still best not to be too lazy. Here's why.
1. Your portfolio becomes skewed over time
For one thing, your lazy portfolio will change over time, even if you do nothing. Let's say the stock market goes down and bonds go up. Your bond fund, which started out as 40% of your portfolio, might now be 50% or 60%. When bonds go down again, you have a much bigger exposure than you thought you had.
It's better to keep actively rebalancing your portfolio so that you keep returning to the original allocations. Not only does this prevent your portfolio from becoming skewed toward one asset class, but it also means you're selling when a fund has had a good run and buying when it has done poorly, giving you a better chance of timing the market without even trying.
2. The funds may change
It also pays to keep an eye on your funds because the way they're run and the fees they charge can change over time. Index funds are designed to be similar, but they're not all the same. Some track the index more efficiently and at lower cost than others. The best choice now may not be the best choice five years from now.
3. Your situation may change
Your life changes, too, and your asset allocation should change with it. You may be OK with a large stock allocation now, but if your job becomes more insecure, you may need safer investments. How much you can invest, how much risk you can afford to take, what your time horizon is -- all these things should affect your asset allocation.
4. You can dodge a bullet
And then there are times when passivity is simply not the best approach. When interest rates rise, bond funds almost always take a hit. Should you really just sit and watch passively as your money ebbs away? It makes sense at least to reduce your exposure if you see trouble ahead. Similarly, with the stock market, if you think there's a bubble rising and stocks are overvalued, cutting back is a good bet.
The principles of the lazy portfolio are sound, and it's certainly a better strategy for most investors than trying to day-trade with leveraged ETFs. But even though it's the holidays, try to avoid being too lazy.
If you're going to take a passive approach, at least check in every now and then to make sure you're still investing in the right funds and in the right amounts. It's good to take the long-term view and keep things simple, but you can do better than just setting your investments to cruise control.
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