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Most (maybe all) of the rest should be in stocks. Some of these should be stocks in American companies, and some should be in foreign companies. But there's a lot of disagreement over how much the average investor should put into foreign markets: Some say about 10%, and others say at least 30%.

These three funds—a bond fund, a U.S. stock fund, and a foreign stock fund—should form the core of your portfolio. Some folks will also want to add a smattering of other assets, like real estate or commodities, but that's beyond the scope of this book.

One good way to get started with asset allocation is to use a lazy portfolio, a balanced collection of index funds designed to do well in most market conditions with a minimum of fiddling by you. Think of lazy portfolios as recipes: A basic bread recipe contains flour, water, yeast, and salt, but you can build on it to get as elaborate as you'd like. The lazy portfolios that follow are great starter recipes for long-term investing—and they may be the only recipes you'll ever need.

Note

When it comes to investing, there's no shame in being "lazy." As you learned earlier in this chapter, messing around with your investments all the time—chasing hot stocks, timing the market, and so on—will get you lower returns than taking a hands-off approach. So if you're not keen on telling your friends that you're a "lazy investor," just tell 'em you're being smart with your money!

The Couch Potato Portfolio by Scott Burns

This two-fund portfolio from financial columnist Scott Burns may be the simplest way to achieve balance. It's evenly split between stocks and bonds, and should appeal to you if you're both lazy and risk-averse:

50% Vanguard Inflation-Protected Securities (VIPSX)

50% Vanguard Total Stock Market Index (VTSMX)

You can read more about this portfolio at http://tinyurl.com/LP-potato. Burns has also created a "couch potato cookbook" that lists several different lazy portfolios and answers some common questions; you can find it at http://tinyurl.com/LP-cookbook.

Note

All the portfolios in this section consist of index funds from The Vanguard Company (www.vanguard.com). Vanguard is a good source for index funds because they have a huge selection, but it's not the only source. Also note that those crazy letter combos—VFINX, VBMFX, and so on—are just ticker symbols, abbreviations that help investors name stocks and mutual funds. Ticker symbols (also called stock symbols) make it easier to find info on various securities. Type MSFT, Microsoft's ticker symbol, into Google to see for yourself.

The Second-Grader Portfolio by Allan Roth

Allan Roth is a Certified Financial Planner and a Certified Public Accountant, so he knows a thing or two about money. In his book How a Second Grader Beats Wall Street, Roth explains how he taught his son about investing. Here's his lazy portfolio, which adds foreign stocks to the mix:

40% Vanguard Total Bond Market Index (VBMFX)

40% Vanguard Total Stock Market Index (VTSMX)

20% Vanguard Total International Stock Index (VGTSX)

This is the medium-risk version of Roth's second-grader portfolio. For higher risk, you'd put 10% into bonds, 60% into U.S. stocks, and 30% into international stocks. A lower-risk allocation would be 70% in bonds, 20% in U.S. stocks, and 10% in foreign stocks.

The No-Brainer Portfolio by William Bernstein

William Bernstein is a retired neurologist who has turned his attention to financial matters. He wrote The Four Pillars of Investing (McGraw-Hill, 2002), which is one of the best books on investing published in the past decade. In his book, he suggests several different portfolios, including this "no-brainer" collection of index funds that keeps things simple:

25% Vanguard 500 Index (VFINX)

25% Vanguard Small-Cap Index (NAESX)

25% Vanguard Total International Stock Index (VGTSX)

25% Vanguard Total Bond Market Index (VBMFX)

You can read more about this portfolio at http://tinyurl.com/LP-nobrain.