I normally never use the term 'lazy' to describe myself; 'passive aggressive' just isn't my thing; and I prefer 'frugal' to 'cheap’, but being a lazy, passive-aggressive, and cheap investor is a skill I've worked hard to perfect. And putting together a perfect set-it-and-forget-it portfolio has served me well over the last two decades, and here's why:
Lazy like a fox
You may think to get anywhere with your money you have to roll-up your sleeves and get involved, consult with the experts, or wheel and deal with pockets full of borrowed cash like Kevin Bacon in Quicksilver. Indeed, much of the financial industry may try to convince you that with complexity comes better returns — when in reality complexity can be expensive, potentially tax-inefficient, and comes with no guarantees.
In my life as an investor, I’ve found that a simple plan, which is easy to understand, appropriately calibrated to my risk tolerance, and inexpensive allowed me to get started early, and keep at it for the long term, while leaving more money in my accounts to compound. In other words — I've gone lazy. And a Lazy Portfolio is one of my favorite tools for regular people who want to invest, diversify away unsystematic risk, and pay as little as possible to do it, and I think it's foxy for several reasons:
It's easy to understand. I'm a financial expert with my own independent financial planning firm — but when I got started investing I was untrained and doing it on my own. It was important to me to understand what I was buying, so that I could stick with a plan. A lazy portfolio allows you to clearly allocate your investments between stocks and bonds, and even fine tune a percentage for international investment — all with fewer funds than fingers on one hand. Over the years as I learned more about investing, instead of adding complexity, I've doubled down on laziness, having confirmed time and again by professors, mentors and the Second Grader Portfolio, that the simple strategy is indeed the best.
A Lazy Portfolio practically manages itself. The term lazy doesn't refer to lack-luster returns, but rather to you as the investor. I've found that to maintain an asset allocation with just a few mutual funds can take less than an hour of attention per year. I rebalance annually by selling off a little of my highest performers to add funds to my slower performers. That's right a tiny bit of middle school math and I'm done — ready to go back to blissfully ignoring it.
I avoid the pitfalls of my flawed, and emotional human brain. We all think we're smarter than the average bear, but Nobel Prize winning economist Daniel Kahneman has proved this isn't the case when it comes to investing. The field of behavior finance has shown that our ability to time the market in pursuit of higher than average returns has cost us dearly. Going lazy means there's almost nothing to do to manage your investments, and you rarely need to grab the steering wheel. Sticking to a predetermined plan means you'll be making less emotional decisions based on short-term movements in the market, cutting back on our own user-error.
Ending up with more as a cheap investor
You won't be surprised to find out that the MBAs running actively managed mutual funds do not work for peanuts, and neither do commission-based Investment Advisors who design portfolios that contain those active funds. But these are often the people we look to for guidance with our money, and their advice comes at a premium.
Active management, while touted as your one shot to beat the market, rarely does so. And if you believe the New York Times — better than average gains are random from one year to the next, and impossible for more than five years in a row. So handing your money over to active management in the decades leading up to retirement will likely expose your saving to frequent below-average results pulled lower by the premium paid in sales commissions and fees.
The good news is that when you give up the expensive dream of beating the odds to embrace the market average — investing can be very cheap. For example, doesn't it sound better to track the average performance and pay as little as 0.05% in annual fees instead of maybe beating the market by 1.5% only to pay 2% in fees? When you're paying high fees you not only need to beat the market, you've got to really beat the market every year to just be average — and that simply isn't realistic. If instead you track the market average you'll deduct less from your account for fees, leaving more money to compound and grow.
The wisdom of being average-on-the-cheap is not lost on Billionaire investment guru Warren Buffett who could afford any management from any investment firm in the world, but has directed the money he leaves to his wife be placed in low-cost index mutual funds. And in year nine of his famous ten year, million dollar bet with the active managers of the Protégé Partners hedge fund, where he pitted the returns of Vanguard's low-cost S&P 500 fund against Protégé's selection of five actively managed funds-of-funds, he is by far in the lead.
Fees matter. Warren Buffet knows it, I know it, and now you know it.
Passive Aggressive doesn't have to mean flashing the stink-eye
With a long term horizon, and the ability to weather short-term volatility in the market — passive-aggressive is my go-to strategy. It may sound like giving the cold shoulder, but in financial terms, to be passive-aggressive is to combine a highly diversified and tax-efficient investing style with a long-term, high-growth risk tolerance.
I've got a good 21 years before I shift to fulltime Lounger-In-Chief, so I feel comfortable exposing my investment dollars to significant market risk with stocks in order to capture as much growth as possible for the next several years. I'll ratchet down my risk as I get closer to retirement, gradually shifting funds to safer bonds. But for now I don't need to touch that money, and I feel comfortable letting it cook on high. In my opinion, being aggressive with my investments at this stage of my life will give me the best chance of keeping ahead of inflation and then some over the long term. However, if you're closer than I am to your goals and will need access to your funds sooner, you'd be well served to lean your investments towards a mix of safer vehicles like bonds and cash. Take this risk tolerance questionnaire to find out.
I want exposure to stocks for the potential gains — but I'm no dummy — which is why I take my aggression passively. To be passive is to track a predetermined index (a list of securities), and stick with it. It's a buy and hold strategy that allows you to own the whole market while avoiding excessive fees and the downward drag on performance of frequent trading. By being so highly diversified, I can eliminate all unsystematic risk, and because there's no active manager messing with my market efficiency, I don't need to pay much. When you're aggressive, you open yourself up to a degree of uncertainty, and it's important to me that along with that uncertainty I'm not also battling high costs.
To sum up, here's why I'm lazy, passive-aggressive and cheap
No one can predict the future, or know what will happen in the stock and bond markets going forward — but I believe that the market is efficient, and that long term it can be counted on to grow. I want to make my investments as boring as possible so I barely pay attention, and remove my flawed human mind from the equation, side stepping emotional decisions around investing. And If I am going to own the whole market, what's the point of paying expensive fees and commissions for active management? I'd rather be average, spend my time thinking about other things, and keep as much money growing in my account as possible.
The foregoing content reflects the opinions of Insight Personal Finance, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
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