Vanguard Index Funds – The 3-Fund ‘Lazy’ Portfolio

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The ultimate investing strategy and portfolio structure of the index investor may be that of the “lazy” portfolio. It combines the passive investor’s highest virtues, which include simplicity, frugality and humility.

VanguardSo what better way to combine all of these pieces of wisdom into a low-cost, three-fund portfolio of index funds that can work for the set-it-and-forget-it investor?

John Bogle, legendary investor and founder of Vanguard Investments, once said not to look for the needle, but to invest in the haystack. The haystack to which he refers is the whole market, or a large sampling of an asset class, such as a large-cap stock index fund. In short, Bogle believes that you should capture as many securities within the capital markets as you can — and at the lowest possible cost.

In keeping with the virtues of passive investing, combined with Bogle’s haystack philosophy, we can capture the entire market of securities with Vanguard index funds, investing in just three broad categories: U.S. stocks, foreign stocks and bonds.

And now for our three-fund lazy portfolio of Vanguard index funds.

Vanguard Index Funds – Vanguard Total Stock Market Index (VTSMX)

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Type: U.S. stock

With Vanguard Total Stock Market Index (VTSMX), you’ll capture the entire U.S. stock market, holding more than 3,700 stocks, and at a dirt-cheap expense ratio of 0.17%, or $17 for every $10,000 invested.

The power of frugality is revealed in this index fund by evidence of its 17th percentile rank for the 10-year return compared to its large blend category. Total Stock Market is able to beat 83% of its category peers because it has more than a 1% lead on the average category expense ratio.

Although the fund is heavily weighted to large-cap stocks, its exposure to mid- and small-cap stocks also is integral to outperforming category peers in the past decade. This diversity also makes for an outstanding core holding in our three-fund lazy portfolio of Vanguard index funds.

The minimum initial purchase for VTSMX is $3,000.

Vanguard Index Funds – Vanguard Total International Stock Index (VGTSX)

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Type: International stock

Now that you have the virtual U.S. stock market covered, you can capture the foreign stock market with Vanguard Total International Stock Index (VGTSX).

You’ll cover more than 5,600 stocks in developed and emerging markets outside of the U.S. that together account for about 50% of the world’s market cap. For half the world, 0.22% is an extremely low expense ratio, which supports its outperformance of more than two-thirds of category peers, including that of actively managed funds.

The minimum initial purchase for VGTSX is $3,000.

Lazy Portfolio Bond Fund: Vanguard Total Bond Market Index (VBMFX)

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Type: Fixed income

With just two funds, you’ve already covered most of the stocks in the world. Now, you can capture the bond market with Vanguard Total Bond Market Index (VBMFX).

Although this fund is skewed toward government and high-credit-quality bonds, you’ll still get exposure to more than 6,700 bonds in the fixed-income world.

While that may help the fund hold up better during tough economic climates, it also results in lower expected returns. But the rock-bottom fees of 0.2% help make up for any missing exposure to high-yield bonds.

You can add this core bond holding to your lazy portfolio of index funds for an initial purchase of $3,000.

For a moderate-risk lazy portfolio, here’s an allocation guide:

  • 40% Vanguard Total Stock Market Index
  • 30% Vanguard Total International Stock Index
  • 30% Vanguard Total Bond Market Index

Here’s to the virtue of laziness!

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/3-fund-lazy-portfolio-vanguard-index-funds/.

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