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8 Lazy ETF Portfolios

I’m a firm believer that investing doesn’t have to be complicated and that it doesn’t have to require a great deal of ongoing effort. In that vein, I’m always drawn to “lazy portfolios.” The following are ETF renditions of some of the most popular lazy portfolios.

Most of them could be done just as well using regular Vanguard index funds. The ETF versions simply allow you to implement the portfolios at your brokerage firm of choice. (See here for more about ETFs as compared to index funds.)

1. Allan Roth’s Second Grader Portfolio

  • 60% Vanguard Total Stock Market ETF (VTI)
  • 30% Vanguard Total International Stock ETF (VXUS)
  • 10% Vanguard Total Bond Market ETF (BND)

The asset allocation between the funds is clearly intended for a younger, more aggressive investor. But Roth’s idea of keeping it simple applies to everyone. Even for investors close to (or in) retirement, these three ETFs should get the job done.

2. David Swenson’s Ivy League Portfolio

  • 30% Vanguard Total Stock Market ETF (VTI)
  • 5% Vanguard Emerging Mkts ETF (VWO)
  • 15% Vanguard Europe Pacific ETF (VEA)
  • 20% Vanguard REIT ETF (VNQ)
  • 15% Vanguard Intermediate-Term Government Bond ETF (VGIT)
  • 15%  (TIP)

David Swenson, the Chief Investment Officer at Yale University, recommends the above portfolio (a 70/30 stock/bond allocation) in his Unconventional Success. He is a big proponent of equity-oriented allocations for investors with long time horizons.

3. Rick Ferri’s Core Four Portfolio

  • 36% Vanguard Total Stock Market ETF (VTI)
  • 18% Vanguard Total International Stock ETF (VXUS)
  • 6% Vanguard REIT ETF (VNQ)
  • 40% Vanguard Total Bond Market ETF (BND)

“You only need a few asset classes in your portfolio, and after that there are diminishing returns. The mutual funds you choose to represent those asset classes should be the lowest cost funds you can buy.” –Rick Ferri, CFA on the Bogleheads Forum

4. Bill Schultheis’ Coffeehouse Portfolio

  • 10% Vanguard S&P 500 Index ETF (VOO)
  • 10% Vanguard Value ETF (VTV)
  • 10% Vanguard Small-Cap ETF (VB)
  • 10% Vanguard Small-Cap Value ETF (VBR)
  • 10% Vanguard Total International Stock ETF (VXUS)
  • 10% Vanguard REIT ETF (VNQ)
  • 40% Vanguard Total Bond Market ETF (BND)

The title of Bill’s book, “The New Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on with Your Life” is spot on. The above portfolio is intended to be rebalanced once per year and otherwise left alone. Sounds good to me.

5. Larry Swedroe’s Big Rocks Portfolio

  • 9% Vanguard S&P 500 Index ETF (VOO)
  • 9% Vanguard Value ETF (VTV)
  • 9% Vanguard Small-Cap ETF (VB)
  • 9% Vanguard Small-Cap Value ETF (VBR)
  • 6% Vanguard REIT ETF (VNQ)
  • 3% Vanguard Total International Stock ETF (VXUS)
  • 6% SPDR S&P International Dividend (DWX)
  • 3% Vanguard FTSE AW ex-US Sm-Cap ETF (VSS)
  • 3% WisdomTree International SmallCap Div (DLS)
  • 3% Vanguard Emerging Mkts ETF (VWO)
  • 40% Vanguard Short-Term Bond ETF (BSV)

You’ll note that Swedroe’s portfolio is significantly tilted toward small-cap and value equities (with the reasoning that their higher risk levels should bring higher expected returns). It’s more funds than I’d personally like, but Swedroe makes a valid point that if you’re only rebalancing annually, the additional effort required by having a few more funds in your portfolio is pretty minor.

6. Harry Browne’s Permanent Portfolio

  • 25% Vanguard S&P 500 Index ETF (VOO)
  • 25% Vanguard Long-Term Government Bond ETF (VGLT)
  • 25% Cash (i.e., money market funds)
  • 25% SPDR Gold Trust ETF (GLD)

The idea behind Browne’s Permanent Portfolio is that the four asset classes have sufficiently low correlation that the portfolio should be able to put up modest gains each year under just about any circumstance imaginable.

7. William Bernstein’s No Brainer Portfolio

  • 25% Vanguard S&P 500 Index ETF (VOO)
  • 25% Vanguard Small-Cap ETF (VB)
  • 25% Vanguard Total International Stock ETF (VXUS)
  • 25% Vanguard Total Bond Market ETF (BND)

Bernstein, author of The Four Pillars of Investing, suggests the above portfolio for investors with a long time horizon. Note that it’s very similar to the first portfolio mentioned above (Roth’s Second Grader Portfolio), but with a much heavier allocation toward small-cap domestic stocks.

8. Harry Markowitz’s “Father of Modern Portfolio Theory” Portfolio

  • 50% Vanguard Total World Stock ETF (VT)
  • 50% Vanguard Total Bond Market ETF (BND)

Harry Markowitz–Nobel Prize winner and originator of Modern Portfolio Theory–when asked about his personal portfolio once replied, “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier…Instead, I split my contributions 50/50 between bonds and equities.” The above portfolio is a somewhat tongue-in-cheek implementation of Markowitz’s approach.


Do you have a favorite? Does your portfolio closely resemble any of the above? (For those curious, mine looks very much like the Second Grader Portfolio.)

Update: Monevator has written a revision of this article outlining Lazy ETF Portfolios for UK investors.

Does a Bond Fund’s Yield Tell You Its Level of Risk?

A reader writes in, asking:

“One of the fund choices in my 401K is Bond Fund of America (RBFCX). It has a much lower yield than Vanguard’s Total Bond Market Index Fund: 0.98% vs. 1.57%. With bonds, low yield should mean low risk. But based on the descriptions of the two funds, I don’t see why Bond Fund of America would have less risk.”

Comparing Holdings

Fund names and fund descriptions can be misleading. I think the best way to assess a fund’s risk level is to actually take a look at what’s inside. Typically, that means going to Morningstar.

For a bond fund, I click over to the “portfolio” tab on the fund’s Morningstar page and look at two important pieces of information:

  • Average duration, and
  • Composition of the holdings with regard to credit quality.

In terms of interest rate risk, Bond Fund of America is slightly safer than the Vanguard Total Bond fund, with an average duration of 4.55 years rather than 5.18 years. But from the credit quality perspective, Bond Fund of America is somewhat riskier, mostly due to having a significantly smaller allocation to Treasury bonds than Vanguard Total Bond has (~17% rather than ~37%).

Looking at Pictures

While I’m not one for comparing performance for the sake of picking the higher-performing fund, I do think past performance can be useful for getting an idea of how risky a fund is. One of my favorite ways to do this is to plot a fund’s performance against the performance of a fund I’m more familiar with (e.g., comparing a U.S. stock fund to Vanguard’s Total Stock Market Index Fund).

The following Morningstar chart (click to enlarge) shows the last 10 years of performance for Bond Fund of America (in blue) as compared to Vanguard Total Bond Market Index Fund (in orange).


In short, while these funds are at least in the same general ballpark in terms of degrees of risk (e.g., much less risky than a stock fund), the American Funds fund does appear to have somewhat greater overall risk due to its lower average credit quality.

SEC Yield: After Expenses

So, if the Vanguard fund has slightly less risky bonds, why does it have a higher yield?


A fund’s SEC yield is calculated on an after-expense basis. This is why, for example, if you compare the SEC yield on the Investor Shares and Admiral Shares versions of a given Vanguard fund, you’ll see that they differ by an amount equal to the difference in expense ratios.

The R3 share class of Bond Fund of America that this reader has in his 401(k) has an expense ratio of 0.92%. In contrast, Vanguard Total Bond Market Index Fund’s expense ratio is just 0.10% (for Admiral shares). If the two funds’ holdings were exactly the same, the difference in expense ratios would give the Vanguard fund an SEC yield that’s 0.82% higher than the yield of the American Funds fund.

The Political Risk of Delaying Social Security Until 70

Some people argue that holding off on claiming Social Security is akin to betting that there won’t be any rule changes. I don’t think that’s true. While certain Social Security reforms would make it advantageous to claim earlier, other reforms wouldn’t change the decision at all, and others could actually make it more advantageous to delay claiming benefits.

The five potential Social Security reforms that I see suggested most often are:

  1. Increasing or eliminating the payroll tax cap,
  2. Increasing the payroll tax rate,
  3. Increasing the full retirement age,
  4. Means testing benefits in some way, and
  5. Switching from regular CPI to chained CPI for calculating cost of living adjustments.

Increasing the Payroll Tax Cap or Tax Rate

Increases to the payroll tax cap or payroll tax rate are the easiest reforms to assess for our purposes: They would have no effect on the way benefits are calculated and therefore would not change the when-to-claim decision in any way.

Increasing the Full Retirement Age (FRA)

Increasing the full retirement age does not change the age at which you can claim benefits. Rather, it’s simply a reduction in the amount of benefits you would get at any particular age. (For example, if you claim retirement benefits at age 64 with a full retirement age of 67, you get 80% of your “primary insurance amount.” If your FRA was 68 instead of 67 and you claimed benefits at age 64, you would only get 75% of your primary insurance amount.)

How would an increase in the full retirement age affect the when-to-claim decision? It wouldn’t dramatically change the break-even math, assuming the change is not applied to anybody already age 62 or older.* Nor would it change the fact that delaying Social Security is like buying an inflation-adjusted lifetime annuity that has a higher payout than what you can get from a private insurance company.

For people who subscribe to the “build a safe floor of income” retirement planning philosophy, an increase in their FRA would actually mean they should claim later than they otherwise would. That is, if you have a certain level of safe income that you’re trying to achieve, and your benefit is reduced due to an increase in your FRA, you would then need to delay benefits until a later date in order to hit the necessary level of safe income.

Means Testing

Given that there are many different ways in which Social Security means testing could be implemented, it’s impossible to make a generalized rule about how means testing would impact the when-should-I-claim-benefits decision. So let’s consider a few different possible scenarios.

If the law implementing means testing includes a grandfather clause exempting people already old enough to receive benefits, the change likely wouldn’t impact the decision in any dramatic way.

Similarly, if your income (or wealth, if that’s how the means testing is done) ends up being below the point where means testing takes effect, your decision process would be no different than it is now.

On the other hand, if means testing is implemented somewhere in the middle of your retirement and people old enough to receive benefits are not exempted via a grandfather clause, then exactly how it plays out for you will depend on the facts and circumstances.

  • Having claimed earlier would mean that you had more years of non-means-adjusted benefits, which is good, but
  • If means testing is done via adjusted gross income or “combined income” then having a larger portion of your income come in the form of Social Security benefits could actually decrease the effect of means testing on you. (In other words, waiting could have turned out to be helpful with regard to the means testing.)

Switching to Chained CPI

One proposal getting a lot of discussion recently is to switch the calculation for Social Security cost of living adjustments to chained-CPI rather than CPI-W. This would result in benefits growing at a slower pace over time. Such a change would make claiming early more advantageous than it currently is, because it would mean that, in inflation-adjusted terms, benefits received later are smaller than benefits received earlier. So the sooner you receive the bulk of your benefits, the better.

*More precisely, for those whose FRA would be increased from 67 to 68, it moves the break-even point a couple of months earlier, meaning it becomes ever-so-slightly more advantageous to delay taking benefits.

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How often should you check your portfolio?

I’m not kidding or exaggerating when I suggest that people ignore what the market does from day-to-day, month-to-month, or quarter-to-quarter.

As far as I’m concerned, two glances at my portfolio each year is plenty. Now, before you decide I’m completely crazy, let me remind you that I’m not alone. Some respected investors hold similar opinions:

“Try and avoid the worst hazards of behavioral investing. Follow the basic rule that I follow: Don’t peek. Don’t look at your account. Throw the 401k statement in the trash when it comes.” -John Bogle in an interview with Steve Perlstein.

“The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.” -Benjamin Graham in The Intelligent Investor

Why not check more often?

I’ve always been of the opinion that information is worthless unless it’s actionable. So as far as I can tell, there’s absolutely no good reason to check your account value aside from during your scheduled rebalancing & goal assessment checkups. All that will come from extra checking is extra worry (and perhaps, therefore, a mistake you’ll regret later on).

Part of the reason I don’t check more frequently is that the bulk of our retirement accounts are invested in a “LifeStrategy” all-in-one fund from Vanguard that keeps our asset allocation close to where we want it.

However, from what I’ve read, there’s no predictable benefit from rebalancing more frequently than once per year anyway. So even if you do your rebalancing manually, there’s little reason to check your portfolio more than a couple times each year.

Staying Oblivious

Some people might find it difficult to avoid peeking at their account balances given the constant flow of news about the stock market. Here’s how I do it:

  • I don’t read the newspaper.
  • I don’t listen to the radio.
  • I don’t watch TV.

(Though in all honesty, my reasons for removing those activities from my life has more to do with thinking that they’re a waste of time than it has to do with investing.)

What do you think?

How often do you check your own portfolio? Do you think you’d benefit from cutting back on that frequency? (And do you think you’d be able to?)

Getting Changes in Your 401(k)

Monday’s request for feedback about lobbying for a better 401(k) plan drew lots of responses. It was great to hear from people in a wide variety of circumstances — investors with success (and un-success) stories, people who work in HR departments and who are in charge of making plan decisions, small business owners with similar responsibilities, and investment advisors who provide plan-related services to employers.

Given the volume of replies, rather than sharing them all with you, I’ve tried to synthesize the group’s input into a handful of useful action steps below.

Figure Out What You Want

Step #1, naturally, is to figure out precisely what you want to request. Do you simply want to request the addition of 2-3 low-cost funds to your plan (e.g., a bond index fund and a stock index fund)? Or are you requesting an entirely new plan?

Based on reader input, it appears to be a heck of a lot easier to get funds added to an existing plan than to get your employer to change plan providers completely. This makes sense. It’s easier for management to add a new fund or two than to research new providers, choose one, and move everything over to them. In addition, there’s nobody who has a huge interest in fighting back against the addition of a few new funds, whereas, when trying to switch providers, the representative from the current provider will of course fight tooth and nail to convince management not to switch.

That said, if your plan has high administrative fees (that is, costs in addition to the expense ratios of the funds), switching plans is going to have a bigger impact than simply adding a few low-cost funds.

A third option, if your plan administrator allows it, is to request that your employer add an option to invest outside of the normal fund choices. For example, Fidelity’s BrokerageLink and Schwab’s Personal Choice Retirement Account both allow employees to pick their own funds.

Make Your Request in Writing

Next, write a respectful email to the plan fiduciary (or fiduciaries, if it’s a committee rather than a single person) clearly explaining the change you’re seeking and your reasons for the request.

If all you’re requesting is the addition of another fund or two, this email doesn’t have to be a big deal. You may be successful with the following approach:

  • Provide a source of information that speaks to the importance of low-cost options — reference a few studies or perhaps provide a link to the recent PBS documentary.
  • Briefly highlight the key points of the above-mentioned studies.
  • Specify which funds you would like to see added. It can be helpful to provide multiple options. For example, if you want a low-cost international fund, suggest 2-3 different choices (ideally, one of which is run by a fund family who already has some funds in the plan).

If you’re requesting an entirely new plan, you’ll probably want to include more information in your letter. (The Bogleheads wiki article on campaigning for a better 401(k) has a sample letter you may want to look at.) For example, in addition to providing references to applicable research, you may want to:

  • Briefly mention that the plan fiduciary has a legal obligation under the Employee Retirement Income Security Act (ERISA) to ensure that the cost of services provided to the plan is reasonable, and that a breach of such fiduciary duties can result in liability for the fiduciary.
  • Provide a total of all the costs that plan participants are paying (e.g., average fund expense ratio, plan fees, advisory fees, sales loads if applicable).
  • Suggest a meeting to discuss your request and to respond to any concerns they might have.

Again, providing multiple choices (e.g., Employee Fiduciary or Vanguard) can be a good idea to prevent the possibility of coming across as biased in favor of some specific company.

If your request does not get a response, don’t be afraid to follow up.

Get on the Investment Committee

If your employer has an investment committee that makes decisions for the retirement plan, you will want to see if you can attend the next meeting. Or, even better, see if you can take a role on the committee. (This was a very common refrain among readers who were successful at getting changes implemented.)

Get Help

Naturally, the more employees there are requesting a change, the more motivation management will have to make a change. So if you can find other people who are also interested in lower-cost investment options, so much the better.

Tips for Small Business Employees

In the 401(k) industry, more assets means more bargaining power. So if you work for a business that has added many employees over the last several years, it’s possible that your employer would now have access to lower-cost providers who were not available when the plan was initially created. Be sure to mention this to the plan fiduciary.

In many cases, the plans that are very expensive to employees are very inexpensive to the employer. But in the case of a business with few employees, the business owner is likely one of the largest participants in the plan. So he/she may come out ahead with a switch to a plan that is less expensive to plan participants. Be sure to bring this up.

If, like many small businesses, your employer offers a SIMPLE IRA instead of a 401(k), you may not want to bother with lobbying for changes, because you can roll the money out of the SIMPLE and into a regular traditional IRA at a brokerage firm of your choice (without having to leave your employer) as long as you have had the SIMPLE IRA account for at least two years.

Maintaining Perspective

Throughout this process, it’s ideal to avoid criticizing your plan fiduciary’s decisions — and when you do have to criticize to do so in as tactful a way as possible. You don’t want the decision-maker(s) getting defensive, because then it will be impossible to change their mind on the matter. In addition, it’s important to remember that, from the employer’s perspective, a 401(k) is an employee benefit — they don’t have to offer it at all.

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