What are lazy portfolios and why you should implement them for your goals? (2024)

This article shows what lazy portfolios are and how investors can quickly implement the concept to make reaching their goals more manageable.

📚 Topics covered:

• What is a lazy portfolio?
• Journey towards Lazy Portfolios
  • Phase 1: Chasing complexity
  • Phase 2: Learning for goals
  • Phase 3: Zen phase
• How to create lazy portfolios in India?

What is a lazy portfolio?

A lazy portfolio is one where the individual investments are chosen in a way that they:

• exist as per a plan
• do not get churned frequently
• focus on simplicity and low cost
• are rebalanced as per the investor’s asset allocation and glide-path

Individuals in lazy portfolios do not

• keep a lookout for the next and best or new and shiny investment product
• get influenced by market noise and sensational media headlines
• make any changes to their portfolio without a documented investment plan

Journey towards Lazy Portfolios

Implementing lazy portfolios requires commitment and maturity that can be cultivated or implemented under professional guidance. There are three steps can be seen that investors pass through.

Phase 1: Chasing complexity

Investors in this phase have a few common problems that they are trying to solve:

• looking for the best investment plan: mutual fund, insurance product, high-interest rate investments (like P2P lending)
• have variations of questions like “Should I add a small-cap fund” or “My bank RM told me about this guaranteed plan” or “Should I prepay my home loan.”
• make small investments in multiple similar investments: many mutual funds, a smattering of stocks and a few bank accounts and credit cards
• frequently adding more investments caused by performance chasing (like investing based on star ratings or recent past performance in the case of mutual funds) or investing in every investment product they come across in small amounts

The portfolios of such investors suffer from two main problems:

• a lop-sided asset allocation, usually debt-heavy due to provident fund (EPF) and FD allocation. The converse may also be true with an excess allocation to equities due to a misunderstanding of their ability to take risk
• overly complex portfolio due to small amounts invested in many different options

Phase 2: Learning for goals

Instead of a “where to invest”, we instead move to the goal-based investing approach by first setting investment goals: Set a goal before looking for what to invest in.

Click to read the complete three-step framework:

• Part 1: As someone new to investing and started earning, what should I do with money?
• Part 2: As someone who has heard about goal-based investing, how do I get started?
• Part 3: I am now ready to do goal-based investing. What now?

Once these steps are completed and an investment plan is created (some live case studies are here), then comes the “where to invest” part of the plan.

At this point, we decide to prepare the lazy portfolio by choosing low-cost index funds.

Phase 3: Zen phase

Why choose low-cost index funds?

Image © spglobal.com

There is well-documented proof, for example, in the latest SPIVA report that active funds routinely underperform passive index funds. This fact, coupled with the observation that the same fund does not outperform or underperform its benchmark consistently yearly, means that choosing a “winning” active fund requires luck, not foresight.

Choosing index funds guarantees that the investor makes market returns without any effort or active decision-making. The path to a proper lazy portfolio starts with low-cost index funds.

How to create lazy portfolios in India?

In a future article, we will cover the step-by-step process for creating a lazy portfolio.