An indolent portfolio is an investor’s best friend. It is a portfolio designed to be ignored for a year at a time. Why is that a good idea? Two reasons, really. First, almost everything you do with your portfolio will be a mistake. Morningstar’s long-running series of “Mind the Gap” studies looks at the difference between investor’s actual returns and the returns of the funds in which they are invested.
Those annuals routinely show that investors’ returns are lower than the returns of the funds themselves, because of poorly timed purchases and sales of fund shares. The most recent version shows that investors missed out on almost a quarter of the money they would have made if they had simply bought and held over the 10 years. Two other findings are important as you think about creating your portfolio: (1) the gap was lowest for investors in funds that invested in several different assets, such as both stocks and bonds, and (2) investors in actively managed funds had a smaller gap than investors in passive funds and ETFs.
Second, indolent portfolios are good because you’ve got a life to live! Why on earth would you want to spend time babysitting a bunch of investments when you could be rafting or dating or having really good dinners with friends?
In this essay, we’ll do two things. First, we’ll talk about why you want to act now and not wait until you’re “ready.” Second, we’ll walk step-by-step through the process of creating an indolent, two-fund portfolio for cheap.
Why now?
The one great advantage that investors in their 20s and 30s have is time. If you start with a pittance (say $100) and add a pittance ($50) monthly in a perfectly ordinary US stock fund, at the end of a year you have … a pittance, probably! (Stock markets are unpredictable and volatile in the short term so we can’t guess your 12-month return on your hard-earned $650 investment.)
Pittance after 12 months: who knows?
Pittance after 20 years: $31,000
Pittance after 30 years: $83,000
Pittance after 40 years: $206,000 (source: Investor.gov compound interest calculator, assuming $100 initial, $50/month, 9% nominal rate of return and 9% standard deviation)
Here’s the other way of putting it: if you bite the bullet and start today, you end up with $206,000. If you wait 10 years “until your student loans are paid and you can afford to invest,” you end up with $83,000. In this projection, you lose 60% of your portfolio to delay.
Don’t delay.
What to do?
The one great disadvantage that investors in their 20s and 30s have is uncertainty. Not sure how to get started. Not sure what’s a scam. Anxious about making a big mistake.
It’s not that hard. We can help you construct an Indolent Portfolio, that is, one that you don’t have to babysit so that you can get on with life and still have the prospect of some financial security now and in the future.
Three easy steps:
- Step up an account at an online brokerage. It takes under 10 minutes. Chip and I use Schwab, other MFO members have other preferences. You’ll need your banking information so you can move money easily between your savings account and your investment account.
- Set up a two-fund portfolio. One fund should be designed to act like a savings account on steroids; that is, it earns enough interest to overcome the effects of inflation without the prospect of serious loss. The other fund should be designed to generate substantial long-term growth while still being very risk-conscious so that you can still sleep at night.
- Invest equal amounts automatically in each fund monthly. The first fund will serve as your emergency fund, it acts as a financial safety net for unexpected events like job loss, medical emergencies, or major repairs. Planners recommend having enough money set aside to pay your bills for three months if you’re sick or out of work. In reality, if you create a $1,000 safety fund and don’t dip into it for routine stuff, you would be in the top half of all Americans for financial security.
We screened over 8,000 funds and ETFs to identify income funds that consistently produced returns of 3% or more and almost never had negative returns and growth funds that consistently produced returns of 8% or more with exceptional risk protection.
| Ticker | Role | Returns | Why this fund? | Minimum investment at Schwab | |
| RiverPark Short-Term High Yield | RPHYX | Income | 3% – 10-year avg. | David Sherman’s fund has the best risk-adjusted returns of any fund in existence. Period. It generates 3-4% most years and has never gone negative. | $100 |
| Leuthold Core | LCORX | Growth | 7% – 20-year avg. | Leuthold Core pursues capital appreciation and income through the use of tactical asset allocation. The objective is to avoid significant loss of capital and deliver positive absolute returns while assuming lower risk exposure and lower relative volatility than the S&P 500. (There’s also an ETF version of the fund, LCR.) | $100 |
| Intrepid Income | ICMUX | Income | 4.2% – 10-year avg. | The managers invest mostly in shorter duration corporate bonds, both investment grade, and high yield, to get a higher yield than ultra-safe US Treasury securities without taking significant default or interest rate risk. | $2500 |
| FPA Crescent | FPACX | Growth | 8.4% – 20-year avg. | Crescent started life long ago as a hedge fund seeking, then and now, to produce positive absolute returns by investing across capital structures, geographies, sectors, and market caps. | $2500 |
Nota bene: Snowball owns substantial personal positions in FPA, Leuthold, and RiverPark but we have no financial stake in these or any of the firms we write about.
We had Perplexity.ai create two portfolios for you: LCORX + RPHIX and FPACX + ICMUX. Both started at 50/50 and were annually rebalanced back to 50/50.
Leuthold Core + RiverPark Short-Term High Yield generated average returns of 5.1% annually over the past decade. You would have had two losing years over the volatile past decade, but in each case, your portfolio would have declined by just 1.9%. RiverPark, your income fund, would never have lost money so your emergency fund would have kept growing. Your portfolio would generate 70% of the long-term returns of a typical 60/40 balanced fund, represented by the passive Vanguard Balanced Index Fund (VBINX) or the active Vanguard STAR Fund (VGSTX) but would subject you to just 45% of the risk. The price for creating this portfolio starts at $200.
FPA Crescent + Intrepid Income generated average returns of 7.7% annually over the past decade. In exchange for those higher returns, you would have had three losing years with an average loss of 3.8% in your down years. Intrepid, your income fund, would have lost money in three years with an average loss of 1.7%. Your portfolio would match the 10-year returns of the Balanced Index or STAR with only 75% of their volatility. Another win! The starting price here is between $2500 (start with one fund then add the other once you hit $5000 total) and $5000.
Bottom Line
Your best hope for financial security starts here. Invest slowly and steadily, not in flashy possibilities, but in funds that have performed well across the years and have prevailed against many challenges.
