Build Your Own 'Lazy Portfolio!' 6 Rules
Yes, you can build a million dollar nestegg, its simple, you can do it
ARROYO GRANDE, CA. (MarketWatch) – “Investing should be dull,” says Nobel Economist Paul Samuelson, “investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas” or Wall Street. Investing really is simple and easy, anyone can do it. You can. Here’s how.
Several years ago I started tracking the best portfolios I could find in America, simple portfolios being used by Nobel Prize winners, millionaires, conservative portfolio managers, neuroeconomists as well as average Main Street investors. We even found some in books like Investing for Dummies and The Idiot’s Guide to Investing.
We discovered something amazing. They were all saying the exact same thing: All you need is a simple, well-diversified portfolio of just three-to-eleven funds, low-cost, no-load index funds that will create a long-term winner through bull and bear markets. And you do it with no market timing, no active trading and no commissions. “Lazy Portfolios” are that simple. So what about the other thousands of stocks, bonds and mutual funds being hustled by brokers? Forget them!
But don’t you need help? Personal finance legend Jane Bryant Quinn put that issue to rest in her classic, Making the Most of Your Money: “Most of us don’t need professional planners. We don’t even need a full-scale plan. Conservative money management isn’t hard. To be your own guru, you need only a list of objectives, a few simple financial products, realistic investment expectations, a time frame that gives your investments time to work out, and a well-tempered humbug detector, to keep you for falling for rascally sales pitches. Don’t put off decisions for fear you’re not making the best choice in every circumstance. Often, there isn’t a ‘best’ choice. Any one of several will work.”
If you’re ready to start, here’s how: Get to know the eight “Lazy Portfolios.” It won’t take long. Then use your own judgment and customize a portfolio that fits your needs, your age, your lifestyle. Trust yourself. Many readers simply start with one of the eight. Then over time they fine-tune their portfolios as they add new money from savings. It’s really that simple. This strategy is being used successfully by boomers and multi-millionaires, young families with modest savings, college students just starting out, even grade-school kids.
Here’s what people tell us works: Six simple rules guaranteed to help you diversify, lower risk, level out bull/bear cycles and generate returns that beat market benchmarks without having to waste your time playing the market. Build your own “Lazy Portfolio” following these six rules, you’ll win, and more important, you’ll have lots of time left to enjoy what really counts, your family, friends, career, sports, hobbies, living. So here’s why and how this “Lazy Portfolios” strategy works:
1. Swing For Singles & Bet on Every Horse
Lazy investors win by being average. No-Load Stocks guru Charles Carlson uses a baseball analogy: Swing for singles.” Forget the homerun superstars. In Ordinary People, Extraordinary Wealth money manager Ric Edelman has another metaphor: “You’re not in a horse race. You’re playing horseshoes ... merely being close is good enough to win … If successful investors know they can’t pick the right horse, what do they do? Simple: They pick every horse.” Here’s why: Even if you’re starting with a small portfolio of three low-cost no-load index funds, for example, one diversified across the Wilshire 5000 stock index, one across the global stock market index and one across the total bond market index, your “bets” will be spread across more than ten thousand specific stocks and bonds in these three index funds
2. Two. Buy “Quality” and Never Sell
Warren Buffett was once asked about his favorite holding period. “Forever,” said the Sage of Omaha, the best time to sell is “never!” Index funds are the perfect long-term hold. If you buy quality companies and index funds with proven long-term track records, you won’t be tempted to sell when the market dips and talking heads on cable news freak out. Trust yourself, just do it. Remember, your most important decision is the up-front buy decision: So pick funds and stocks on the assumption you will never sell! One of our “Lazy Portfolios” was built by a guy who bought the first index fund in 1976 and still has it. If you had invested $10,000 in that fund back then it’d be worth over $200,000 today.
3. No Market Timing, No Active Trading
Markets are random and unpredictable says Wharton economist Jeremy Siegel in his classic, Stocks for The Long-Run. Siegel researched the stock market’s 120 biggest up and biggest down days between 1801 and 2001. He concluded that only 25% had any rational explanation. In an earlier study of 66,400 investors, behavioral finance professors Terry Odean and Brad Barber concluded: “The more you trade the less you earn.” Buy-and-hold investors beat traders by substantial margins. The most active traders turned over their entire portfolios 258% annually, but their after-tax returns were only 11.4%. The reason: Active traders lose large sums paying higher expenses, transaction costs and taxes. In contrast, buy-and-hold investors turned their portfolios over a mere 2% annually, generating 18.5% returns. That’s 50% higher.
4. Trust the Explosive Power of Compounding
Albert Einstein put it very simple: “There is no greater power known to man than compounding interest.” Compounding is more powerful than nuclear energy. A 25-year-old can put roughly $3,000 in an IRA every year and with ten percent average returns retire a millionaire at 65. A 45-year-old can do it by maxing out their 401(k) with $1,250 a month. Notice the explosive power: At 65 most of your million dollar retirement portfolio will be in the growth of your savings. For example, the 25-year-old will have invested only $120,000 over 40 years, the rest is compounded interest and appreciation!
5. If You’re Not Saving 10%, You’re Spending Too Much
In The Millionaire Next Door, Tom Stanley and Bill Danko tell us of the one habit all millionaires share: “Frugality: They live well below their means … The opposite of frugal is wasteful. We define wasteful as a lifestyle marked by lavish spending and hyper-consumption. … Being frugal is the cornerstone of wealth-building.” The math is so simple: Nothing saved, equals nothing invested, equals nothing for retirement. Start saving at least 10% if you want to retire a millionaire.
6. Keep Investing Very Simple, Then Enjoy Doing What You Love
As the legendary investor Peter Lynch once put it: “If you spend more than 15 minutes a year worrying about the market, you’ve wasted 12 minutes.” In researching 5,000 millionaires for Ordinary People, Extraordinary Wealth, Edelman discovered that they spend an average of about six minutes a day on personal finance. They don’t waste time watching cable news, reading brokerage reports, attending seminars, studying stocks tables, subscribing to financial newsletters, and reading financial newspapers. Six minutes a day, that leaves them 23 hours, 54 minutes every day to do what they really love!
So when you’re ready, step up to the plate and play ball! Or pitch horseshoes. Whichever you prefer. Learn how America’s laziest investors can get on the road to a million dollar nestegg. And remember, have fun along the way and don’t spend a lot of time on investing. There are far more important things in life, not just a career that turns you on, but your loved ones, family, socializing, hobbies, movies, sports, making the world a better place … you know, ordinary, everyday living stuff.
And if you want more details, check our book, The Lazy Person’s Guide to Investing.