This ‘Lazy Investor’ Strategy Can Make You Rich
You don’t have to be an expert on Wall Street to pick stocks and analyze the financial markets to generate long-term returns. In fact, taking a hands-off, lazy approach to investing instead of buying and selling in the market may be the key to making you rich.
Earning enough to make long-term goals like retirement a reality requires consistency and diversification. Here’s how to do this with a three-fund portfolio strategy.
A portfolio with three bags
Each investor’s plan should be based on their unique goals, risk tolerance and time horizon. But for some, a low-maintenance, three-fund portfolio can do the trick.
A portfolio of three funds consists of the following:
- US stock market index fund
- Stock market index fund
- Total bond market index fund
Many brokerage firms offer these index funds in the form of exchange-traded funds (ETFs), and they often come with low expense ratios.
Save Smartly: Manage your money with Rocket Money’s budgeting app, one of Money’s favorites
The beauty of the three-bag portfolio
Low expense ratios are a major advantage of this portfolio. But another reason why this strategy can work is its versatility and long-term approach. Diversification involves putting your money in a variety of assets such as small-cap, mid-cap and large-cap stocks from the US and other countries, as well as bonds, to reduce risk. The idea is that when one part of your portfolio underperforms, the other will hold tight or even aggressively, reducing overall risk.
This is the type of strategy that does not produce immediate life-changing returns, but compounded growth over many years can lead to a large nest egg by the time one is ready to retire. It is important to stay the course during a market downturn so that you can profit during the recovery.
Gold Offer: Sign up with American Hartford Gold today and get a free investor kit, plus get up to $20,000 in free silver on qualifying purchases.
Disadvantages of the three-fund portfolio
Like most investment strategies, this portfolio will not make sense for all investors. As Morningstar experts point out, it may not make sense to use this portfolio in taxable accounts, since a taxable bond fund will generate income distributions on which you will have to pay taxes. Also, you won’t have the same high growth potential of growth-oriented funds, and you won’t get exposure to other investments.
Remember that you still need to rebalance every time you use this strategy, as one part of your portfolio may grow too large in value compared to the other, increasing risk.
More Money: See how you can get up to $1,000 in stocks when you fund a new SoFi investment account
How to set up a three-fund portfolio
Setting up a three-fund portfolio can be simple. The first step is to choose a low-cost brokerage account such as Vanguard or Fidelity Investments.
Then decide how you want to allocate your money based on your risk tolerance. Putting 60% of your funds in stocks and the remaining 40% in bonds is a common strategy. Investors with a high risk tolerance may lean more toward stocks, while risk-averse investors will likely choose to allocate a higher percentage to bonds.
Finally, you can set up automatic contributions so that money from your bank account goes automatically to your investments. You can create a custom balance based on changes in your portfolio and risk tolerance. Investors typically put more money into bonds as they get older, especially if their stock positions have recently converged.
