How to build a lazy portfolio

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This article will address how to use the investment options in employer retirement plans to create a lazy portfolio.[footnotes 1]

The process starts by deciding on a stock / bond asset allocation, reviewing the available funds, then selecting the appropriate funds to create the portfolio. We will illustrate two asset allocation plans using a 60% / 40% stock to bond allocation:

  • For total market investors: A three-fund indexed portfolio;
  • For multifactor ("slice and dice") investors: The seven-fund indexed Coffeehouse portfolio.

Asset allocation

The first step when starting an investment program is to choose your asset allocation, basically your allocation to stocks, bonds, and cash. Be sure to consider this in the context of your entire portfolio. When beginning participation in an employer's retirement plan, this means incorporating both the plan investments and your existing investments in your overall allocations. The allocations should reflect your return needs balanced against your tolerance for risk. For most investors this will mean hopefully gaining returns that, in the long run, outpace inflation, while reducing the magnitude of short term investment losses to a level that allows the investor to remain invested without panic selling.

Three-fund portfolio (for total market investors)

Three-fund portfolio with a 60/40 asset allocation

The three-fund portfolio attempts to simplify the investing process by utilizing three total market index funds holding broadly diversified stock and bond investments. The portfolio is meant to be a buy-hold-and rebalance portfolio. The three asset classes required for this portfolio are listed below:

Three-fund portfolio
Ranking by Percentage Fund Percentage
1 Total Stock Market Index (US Stocks) 40%
2 Total Bond Market Index (US Bonds) 40%
3 Total International Stock Index (International Stocks) 20%
Total 100.0%
60% Stocks = 40% US Stocks + 20% International Stocks
40% Bonds = 40% US Bonds

Select whichever asset class indexed funds are available in the employer retirement plan to fill these allocations and use other accounts to fill out the allocation. [footnotes 2] (Extended illustration in footnotes).

Coffeehouse portfolio (for "slice and dice" investors)

Schultheis Coffeehouse portfolio with a 60/40 allocation

The Coffeehouse Portfolio is a "slice and dice" portfolio which uses seven index funds allocated in a 60% stocks / 40% bonds allocation. The portfolio is meant to be a buy-hold-and rebalance portfolio.

Coffeehouse Portfolio target allocations
Ranking by Percentage Fund Percentage
1 Intermediate-Term Bond Index (US Bonds) 40.0%
2 Large Cap Index (US Stocks) 10.0%
3 Large Cap Value Index (US Stocks) 10.0%
4 Small Cap Index (US Stocks) 10.0%
5 Small Cap Value Index (US Stocks) 10.0%
6 REIT Index (US Stocks) 10.0%
7 Total International Index (International Stocks) 10.0%
Total 100.0%
60% Stocks = 10% US Stocks (6 entries - REITs count as US Stocks)
40% Bonds = 40% US Bonds

Select whichever asset class indexed funds are available in the employer retirement plan to fill these allocations and use other accounts to fill out the allocation.[footnotes 3] (Extended illustration in footnotes).

Employer plan checklist

Employer plans can have many investment options, presenting investors with a long list of unfamiliar names. The following checklist can help you find the offerings that can help fill your desired asset allocations. For our sample portfolios, we would be looking for index funds matching our targeted asset classes.

  • For each item in the plan fund list, find the available asset class exposure that the funds provide and their expense ratios. [footnotes 4] This information can usually be found in the fund's fact sheets.[footnotes 5]
  • Since our desired portfolios are indexed, seek out the plan's index funds, such as the "SSgA S&P 500 Index" (US Stocks) or "SSgA US Bond Index" (US Bonds) or "SSgA Global Equity Ex US Index" (International Stocks, which sometimes have an alphabet soup of acronyms like MSCI EAFE). The fund's fact sheet will list the asset allocation information.[footnotes 6] (Extended illustration in footnotes).
  • Employer provided plans typically contain at least one or two index funds. Some plans may have a brokerage window that provides access to a wider selection of indexed investment options, but be sure to calculate the expected cost of utilizing this service, taking into account all fees that would apply and compare it to the cost of using the fund choices in the qualified plan in order to help guide the decision.
  • The plan may not provide total market index funds. A common example is a plan offering only an S&P 500 index fund. You may need to approximate the total market by using funds that "complete" the S&P 500 index. Similarly, plans often provide international exposure with a developed market index fund, which lacks the emerging market stocks and small cap international stocks included in international total market funds.
You can find detailed information on how to approximate total market allocations at:
  • The plan may only contain actively managed funds. In this circumstance one should select the lowest cost stock funds and highest grade bond funds that approximate the targeted assets classes. [footnotes 7] (Extended illustration in footnotes).

Target date retirement funds

The default option for employer provider plans is to place your contributions and employer matches into a target date retirement fund. If you are thinking of using a target date fund be aware that many plans offer retirement date funds that invest in a large number of actively managed funds. You need to carefully check the underlying funds to see if they truly match your desired allocation. [footnotes 8].

Some plans may provide you with target retirement plans with indexed target date funds which can provide you with a variant of the three-fund portfolio. Examples would include plans holding Vanguard target retirement funds and the Thrift Savings Plan target retirement fund series.

An advantage of tax-deferred accounts is that you can transfer among the different funds without paying taxes on the gains. In other words, you are not stuck with this decision. There is no penalty for changing your mind later. If you feel more confident about lowering your expenses by going to separate low-cost funds at a later time, you are free to do so.

Using a target date fund to approximate a lazy portfolio

If you are a novice investor seeking to use a three-fund or four fund portfolio, Vanguard's Target date retirement funds can provide models for your portfolio since they are nothing more than lazy portfolios, utilizing total market index funds, designed and managed by investment professionals. Your decision is to simply align your desired asset allocations with the appropriate target retirement fund.

Refer to the article for a comprehensive overview.

Inflation-protected securities

Bond funds identified as inflation-protected, like TIPS, are somewhat different than a conventional bond fund. Their purpose is to help diversify your portfolio further by providing some protection against inflation.[footnotes 9]

One Boglehead approach is to add inflation-protected securities to the bond portion of your portfolio, perhaps up to 50% of the bond allocation. The choice is arbitrary - from not using any inflation-protected fund up to 50% (or more). The decision is based on a level of comfort (can you sleep well at night) rather than one based on theory.

Multiple accounts

If you have a partner, a frequently encountered situation is that the investment portfolio is allocated to a multiplicity of accounts. For example, a husband and wife may both have employer provider plans, both have personal retirement plans, both have taxable accounts. This equals six accounts. [footnotes 10]

Even if you are a single individual, it is possible to accumulate accounts over an investing lifetime. For example an individual might accumulate a current employer provided plan, a rollover IRA holding the assets from a past job's 401-k plan, a Roth IRA, and a taxable account.

For guidance on handling these more complex scenarios, see Asset allocation in multiple accounts


  1. This technique will work for any list of funds. However, assistance with employer plans is a common request by new investors in the Bogleheads forum; so we will focus on this aspect.
  2. For example, Forum discussion 401k investment offers the options displayed in the table below. The plan contains Vanguard target retirement funds and standalone fund selections, which are suitable for creating a three-fund portfolio. (Open table to view fund options and expense ratios.)

    In this instance, the investor can capture the three fund portfolio by using the fund selections in the table below. Selecting a Vanguard target retirement fund would create a variant of the three-fund portfolio, as the funds' add an international bond index fund to the portfolio. Vanguard target date retirement funds are four-fund portfolios.

    Fund Expense ratio
    SSgA S&P 500 Index SL-XII 0.03%
    Vanguard Extended Market Index-Inst 0.12%
    SSgA Global All ex US Index NL-C 0.40%
    NT Collective Aggregate Bond Index-Tier 1 0.07%
  3. The following plan posted in the forum discussion: First 401-k Advice contains options that partially fulfill the Coffehouse portfolio allocation. (Open table for a complete listing of fund choices and expense ratios.)

    The investor could use the following funds:

    Asset class Fund Expense ratio
    US large cap stocks SPTN 500 INDEX INST (FXSIX) 0.05%
    US small cap stocks VANG SM CAP IDX INST (VSCIX) 0.08%
    International total market SPTN GLB XUS IDX ADV (FSGDX) 0.28%
    Total US bond market SPTN US BOND IDX ADV (FSITX) 0.17%

    The investor would need to hold US value and US small value stocks in additional accounts.

  4. 401-k plans can impose administrative costs on employees in addition to fund expense ratios. Many 401-k and 403-b plans are funded with variable annuity contracts which can impose fees in addition to the funds' expense ratios. Make sure you are aware of the total costs.
  5. Hint: Put everything in a spreadsheet. It's easier to make updates and will help when calculating percentages and fund amounts later on.
  6. For an example of a plan with a mixture of index funds and active funds on the plan fund menu, see the fund options in the plan revealed in Any good funds in this list, forum discussion. (Open table to reveal fund options and expense ratios.)
  7. For example, 401k Choices Seem Expensive, forum discussion reveals a 401-k plan offering only active funds. (Open table to reveal fund options and expense ratios).

    In this instance, an investor could minimize costs and fashion a three fund portfolio of large cap US stocks, developed market international stocks, and an investment grade intermediate bond fund:

    Fund Expense ratio
    American Funds Invmt Co of America R4 RICEX 0.65%
    American Funds EuroPacific Gr R4 REREX 0.85%
    American Funds Bond Fund of Amer R4 RBFEX 0.60%
  8. For example, Fidelity Freedom 2035 Target Date fund employs 24 actively managed funds as the underlying investments for the fund (see Analyze the Fidelity Freedom 2035 Fund (FFTHX) composition). American funds employ 17 active funds in its target fund. T. Rowe Price uses 17 active funds and one index fund in its 2035 fund. American Century uses 13 active funds in its 2035 target fund
  9. Inflation-protected securities actually protect against unexpected inflation, which is not discussed here.
  10. In addition to the doubling of marital investment accounts (employer provided retirement accounts, personal retirement accounts, and taxable accounts), it is possible to have even more potential accounts. These additional accounts may include:

See also