1. Background and Philosophy
The Simple Path to Wealth Portfolio is a lazy portfolio strategy introduced by JL Collins in his book The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life. Collins, a financial independence advocate and blogger, emphasizes simplicity, low costs, and long-term investing. His philosophy centers on avoiding complexity, minimizing fees, and staying the course through market volatility. The portfolio is designed for both wealth accumulation and preservation, with a focus on total market index funds. Collins advocates for a two-phase approach:
- Wealth-Building Phase: Invest solely in a total U.S. stock market fund (e.g., VTI).
- Wealth-Preservation Phase: Add a total bond market fund (e.g., BND) to reduce volatility as one approaches retirement.
2. Asset Allocation, Diversification, and Risk
The portfolio’s allocation is straightforward:
- 75% VTI (Vanguard Total Stock Market ETF): Provides exposure to the entire U.S. equity market, covering large-, mid-, small-, and micro-cap stocks. This offers broad diversification across sectors and industries.
- 25% BND (Vanguard Total Bond Market ETF): Covers the U.S. investment-grade bond market, including government, corporate, and mortgage-backed securities. Bonds reduce portfolio volatility and provide income.
Pros:
- Simplicity: Easy to manage with just two funds.
- Low Costs: VTI and BND have very low expense ratios.
- Tax Efficiency: ETFs are generally tax-efficient, especially in taxable accounts.
- Diversification: VTI covers the entire U.S. stock market, while BND provides fixed-income exposure.
Cons:
- No International Exposure: The portfolio lacks non-U.S. stocks, which may limit diversification.
- Moderate Risk: The 75/25 stock/bond split may still be too aggressive for conservative investors nearing retirement.
- Limited Bond Diversification: BND excludes high-yield and international bonds.
3. Application for Retirement Accounts (401(k) and IRA)
Investors can implement the Simple Path to Wealth Portfolio in their retirement accounts as follows: For 401(k) Plans:
- VTI Alternative: Look for a “Total U.S. Stock Market Index Fund” in your 401(k) options. If unavailable, use an S&P 500 index fund (e.g., FXAIX) or a large-cap blend fund as a substitute.
- BND Alternative: Search for a “Total Bond Market Index Fund” (e.g., VBTLX). If not available, use an intermediate-term bond fund or a stable value fund as a substitute.
For IRA Accounts:
- Invest directly in VTI and BND, as IRAs typically offer a wider selection of ETFs and mutual funds.
Note on Missing Funds: If your 401(k) lacks a specific fund (e.g., no total bond market fund), allocate that portion to the closest alternative (e.g., intermediate bonds). If no commodity funds are available, allocate to stocks or bonds instead. The key is to approximate the portfolio’s intended risk and diversification profile.
Rule of Thumb:
- For stock funds, prioritize index funds, especially low-cost index funds
- For bond funds, prioritize core bond funds or high-quality actively managed total return bond funds (if available).
This portfolio is ideal for investors who prioritize simplicity, low maintenance, and long-term growth while accepting moderate market fluctuations.