Is this Lazy Portfolio Strategy right for You? Keep reading to learn more…
The word, “lazy,” rarely has a place in serious discussions, especially where money is concerned, so it’s a bit surprising that financial experts and investors are looking at an approach they call the lazy portfolio.
What is a Lazy Portfolio?
The lazy portfolio is a passive approach to investing. The investor buys and holds on to a number of passive, low-risk stocks that they plan to rebalance every year.
There are many ways to achieve a balanced mix. You can opt to do a 60/40 investment that combines U.S. dollars with foreign currency stocks. Another option is to combine stocks and bonds in your portfolio, which is a simple and low-maintenance portfolio that often works out well for low-to-medium risk investors.
Lazy Portfolio Keys
The key to understanding the lazy portfolio is to know the differences between passive and active investing. Active investors tend to spend a lot of time trying to find a way to step up their game. They read reports, follow the news, keep track of the decisions of top-notch investors and generally do everything in their power to make sure that their portfolio gains significant profits.
The passive investor lets the market work for them. This means allowing their stocks and bonds to go through the usual ups and downs with minimal buying and selling. They are not poring over financial news, looking for the next big thing. They invest in the old reliable stocks, and then occasionally buy a few riskier stocks, too.
What are the Benefits of Using a Lazy Portfolio?
The lazy portfolio strategy does not yield high returns most of the time; at least not the sort that rookie investors imagine when they think of hitting it big through stock investing. However, it does have a few key benefits that can be quite useful.
First, studies have shown that passive investing is usually much more successful than active investing. Data gathered by the Dimensional Fund Advisors revealed that holding on to your portfolio rather than constantly buying and selling can yield better returns. Constantly changing your portfolio can lead to an annual loss of 3.6 percent in earnings.
More importantly, 2014 is a year of potential volatility and uncertainty. Where 2013 saw significant growth for stock investors, 2014 is showing signs of slowing down. The market is starting to show a downturn, and investing experts know little of what is in store for the investment year ahead.
As such, a passive approach through a lazy portfolio strategy can be a defensive maneuver. Though it won’t yield high returns, it also means the investor has a level of protection from the effects of market volatility. If the slow growth continues throughout 2014, the investor’s capital would remain relatively safe. A conservative approach for an uncertain year seems like the logical match.
What is the Best Way to Manage a Lazy Portfolio?
Start by studying existing models, and then choose the one that suits your style. One of the most popular is the three-fund portfolio, which divides your portfolio into three parts:
- The international stocks group.
- The US domestic stocks group.
- The bonds.
The objective of this mix is to gain conservative income by not incurring unexpected risks and losses.
Coffeehouse Portfolio
Another alternative is the Coffeehouse Portfolio where you allocate:
- 40% to bonds,
- 60% among stocks* (with 10 percent each for different blends and values).
*The model also includes international stocks, but this goes under the 60 percent stock fund.
Because the portfolio is low maintenance, it requires very little work. Just rebalance your portfolio annually, or twice a year, if you wish. It is also important to tailor your portfolio to your specific needs. It is easy to want to concern yourself with investment trends, but you should focus on your personal risk tolerance and situation instead. For example, if you’re nearing retirement, invest in conservative and low-risk stocks.
The bottom line is that the lazy portfolio strategy is well worth considering. It may not be a very exciting path, but it can be the best option to remain defensive in a volatile market. For more information on investment portfolios, be sure to review this article, “Slow and Steady: Alternative Investments and Your Portfolio”.
If you want to learn even more about investing, consider taking an inexpensive online class, like the Investing Fundamentals Course.