Key Take-Aways
- Investing does not have to be complicated and simple does not mean low returns
- Passive Investing through ETFs offers investors an easy way to build a diversified portfolio across different asset classes such as stock, bonds, commodities, and real estate
- Platforms such as M1 Finance give you an easy way to automate your investment process and maximize your chances of success
Note, stocks mentioned in this article are for illustrative purposes only, they are not recommendations to buy or sell any security. Please talk to your preferred financial advisor before taking any investment actions.
Investing, done well, is one of the most powerful tools available to grow one’s wealth. Investing in productive assets like stocks, bonds, and real estate has never been easier thanks to the rise of no or low-cost platforms that aim to empower the everyday investor and make getting started easier than ever. That said, simply buying and selling stuff does not make one an investor, and the gamification of investing has made it more difficult for the average person to properly develop good long-term investing habits. This post aims to help those looking to invest in stocks, but want a simple and low maintenance approach. Additionally, if you have invested in stocks before, but have been burned chasing high flyers and want a more sustainable way of investing, this post is also for you.
Passive vs Active Investing
Entire research papers have been dedicated to this topic, and the evidence is largely in favor of passive investing. Passive investing, typically done through a mutual fund or ETF that buys a broad basket of stocks that are weighted by market capitalization, offers investors an easy and low-cost way to gain access to the equity risk premium. In study after study, active fund managers underperform their passive benchmark 90% of the time over 5 to 10-year periods. This does not mean that active investing is a futile exercise and that no manager ever beats the market. However, it does suggest passive investing is the way to go for an investor looking to get the bulk of the gains offered by the market with minimum time and effort.
Lazy Investing
Any properly lazy investor would love to take advantage of the overall benefits of passive investing and the availability of low-cost broad-based ETFs or mutual funds. To this end, a variety of portfolio models have been developed to provide investors a framework to invest across a variety of asset classes such as stocks, bonds, and commodities through low-cost ETFs. Popular lazy investing models include the 2-fund and 3-fund portfolios that invest in equities and bonds, however, different variants of such lazy portfolios also call for the inclusion of real estate and commodities such as gold. The combination of different asset classes aims to take advantage of the benefits of diversification to provide investors with the highest level of return per unit of risk (read here and here to learn more about diversification).
To be a truly lazy investor, the right tools are required, and M1 Finance provides the perfect platform for truly lazy investing. The ability to select your funds and target allocation and have your money automatically invested according to your plan is what makes M1 Finance so powerful. Furthermore, the platform is purpose-built to guard investors against the powerful emotions that can make good investment decision-making hard. For example, they make it possible to rebalance with a single click of a button, reducing the mental friction needed to bring your portfolio into balance during times of market distress (think March 2020, that would have been a perfect time to rebalance from bonds to stocks).
Asset Classes
Most investors are familiar with the concept of investing in stocks, however, a proper lazy portfolio requires exposure to not just a broad basket of stocks but exposure to a variety of entirely different asset classes. A robust portfolio will have broad exposure to global stocks, bonds, real estate, and commodities and luckily this can be easily achieved using different low-cost ETF’s.
The following table showcases return statistics for different model portfolios, starting with only one asset class and ending with a widely diversified portfolio of five assets. The returns are for the period starting May 2004 and ending November 2021.
ETFs used:
- VTI – U.S. Total Stock Market
- VXUS – International Stocks (VGTSX data shown, Vanguard’s Mutal fund)
- BND – U.S. Total Bond Market (VBMFX data shown, Vanguard’s Mutual fund)
- VNQ – U.S. REITs
- GLD – Gold
| Asset Allocation | ETFs | Annual Growth Rate | Standard Deviation | Maximum Drawdown |
| U.S. Stocks: 100% | VTI | 10.7% | 15.1% | 51% |
| U.S. Stocks: 70% U.S. Bonds: 30% | VTI, BND | 9% | 10.5% | 36% |
| U.S. Stocks: 55% International Stocks: 15%U.S. Bonds: 30% | VTI, VXUS, BND | 8.3% | 10.5% | 37% |
| U.S. Stocks: 55% International Stocks: 15% U.S. Bonds: 25% Gold: 5% | VTI, VXUS, BND, GLD | 8.6% | 10.7% | 37% |
| U.S. Stocks: 50% International Stocks: 15% U.S. Bonds: 25% Gold: 5% U.S. Real Estate:5% | VTI, VXUS, BND, GLD, VNQ | 8.5% | 10.8% | 38% |
The above table paints a clear picture of the benefits of building a diversified portfolio. Compared to the 100% stock portfolio, every portfolio offers higher risk-adjusted returns as highlighted by the roughly 33% reduction in annual standard deviation and 30% reduction in maximum drawdown.
Note On Data
Though the table lists Vanguard ETFs, the data at times reflects the performance of Vanguard’s Mutual fund for the simple reason that the fund’s data goes back further. That said, the ETFs and the mutual fund are equivalent in their holdings, and the returns should be the same. The data used is collected from Portfolio Visualizer, and it must be stressed that past performance is no guarantee of future results.
Note On Allocation
Though the table lists specific allocation, the allocation is strictly provided to allow a comparative analysis of the different portfolio profiles. It’s impossible to provide blanket suggestions as each person’s allocation must reflect their unique financial circumstances, goals, and risk tolerance. That said, as a baseline, many financial planners suggest starting with 110 minus your age and using the resulting number as your percentage allocation towards stocks and the remainder towards bonds. For example, for a 20-year old the math would be as follows: 110-20 = 90. This means a starting allocation for such an investor might look like 90% stocks and 10% bonds. From here, an investor can then carve out an allocation to include gold, and real estate if desired.
Common Questions
After reviewing the above table, some interesting questions might arise. Below, we attempt to answer some questions that we thought of after reviewing the data.
Why Invest in International Stocks?
Many might be wondering why we would add international stocks at all as they only reduced performance. The answer is simple. U.S. stocks have been the best place for investors for the period in question, but there is no guarantee that that will continue to be the case. Allocating to international stocks positions investors to take advantage should the future not look like the past.
Why Not Add International Bonds?
We added international stocks, but not international bonds. Why? The answer comes down to foreign exchange rates. Investing in international bonds without hedging the currency becomes a bet on currency fluctuations. For that reason, international bonds are excluded from this analysis.
Why just gold?
Investing in a wide variety of commodities is undoubtedly better than simply investing in one commodity. However, as of yet, there is not an easy way to gain efficient access to a broad basket of commodities. The majority of ETF’s that track commodity prices, do so using commodity futures and are subject to the negative impact of contango—where the future price is above the spot price and converges lower as the expiration date nears. As a result, a long-term buy-and-hold investor is paying a holding fee (in addition to the annual expense ratio) as the futures contract is rolled over to provide the desired exposure.
GLD, and other ETFs where the underlying is physically held by the sponsor (SLV, PPLT, and PALL), get around contango since they hold the actual underlying commodity and thus do not need to roll over any futures contracts. One could make the case for investing in GLD, SLV, PPLT, and PALL, however, as the correlation among them is fairly high, the marginal benefit of spreading the 5% portfolio allocation is fairly low.
Conclusion
Laziness is generally associated with sub-par results, however, in investing, a lazy hands-off approach can yield profitable results. Through passive ETFs, an investor can easily create a robust portfolio composed of stocks, bonds, real estate, and gold that is well-positioned to provide positive returns over time to protect and grow their wealth. Using simple tools such as M1 Finance, everyday investors can create custom-made portfolios to fit their unique investment needs (if you want a tool to track your overall financial health checkout Personal Capital where you can sync all your assets and debts to track your net worth over time). History has shown that a simplified investment approach does not mean a sacrifice in returns and instead will likely deliver better results than an investor would achieve if they invested in a more ad-hoc fashion with no clear plan.
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