By Scott Burns

The basic idea for Couch Potato investing is simple. Actually doing it, alas, isn’t as simple as we’d like it to be. There are even wrinkles to creating a portfolio at Vanguard, the mother lode of low-cost index funds. If you have an account at Fidelity, Schwab, TDAmeritrade or other firms, you’ll face different wrinkles. The main issue is building the portfolio at lowest possible cost.

So I’m going to walk you through how to establish a Couch Potato portfolio, from the easiest to the most complicated, at each of these venues. The Couch Potato portfolios can have as few as two asset classes or as many as ten. If you have a small amount of money, you start with fewer asset classes. You add asset classes as your portfolio grows.

The basic Couch Potato is a very conservative 50 percent equities, 50 percent fixed income, in two index funds. The most aggressive is 80 percent equities, 20 percent fixed income in ten index funds.

We have a lot of latitude in how we do this. We can use funds to fill the asset classes as closely as possible. Or, like home cooking, you can change the recipe at bit. The basic idea is that we always invest in equal dollar amounts in each asset class used (the table below shows the order in which asset classes are added to the portfolios).

The Couch Potato Building Block Portfolios

At Vanguard. Let’s suppose you want to build your portfolio in the traditional way, with Vanguard mutual funds in a Vanguard account. Trying to match the asset class list to what is available from Vanguard you’ll see some minor problems. First, Vanguard doesn’t have an international bond fund. Second, their Energy mutual fund is a managed fund with a $25,000 minimum investment. Unless your portfolio is at least $150,000 (for the six way), that makes Vanguard Energy mutual fund a no-go.

You can solve both problems by using exchange traded funds, SPDR Barclays International Treasury ETF for international bonds and Vanguard Energy index ETF for energy. So you can build the full 10-piece portfolio with 8 mutual funds and 2 ETFs. You’ll face only 2 brokerage commissions.

Unfortunately, unless your account is at least $100,000, those trades will cost you $25 each at Vanguard. So the brokerage cost on two transactions will be $50. That’s 0.17 percent on a $30,000 account.

If you have a larger account, you should also consider doing it using Vanguard ETFs. You’ll have to pay a commission to buy, but the expense ratios are lower for the ETFs. Ironically, you’d probably be better off buying Vanguard ETFs through Fidelity or Schwab because their commissions, at $7.95 and $8.95, respectively, will be a fraction of the cost at Vanguard until your account is at least $1 million.

At Schwab. Early this year Schwab introduced its own line of low-cost exchange-traded funds— but with an interesting wrinkle. You can buy them without paying a commission. As a consequence, you can build the full 10 Speed portfolio using 5 no-commission Schwab ETFs and 5 non-Schwab ETFs. On those, you’ll pay a commission of $8.95 each. You won’t want to do this with a small IRA account, but the cost of 5 annual commissions on a $30,000 account is only 15 basis points or 0.15 percent.

At Fidelity. Not to be outdone, Fidelity followed Schwab by offering no commissions on the purchase of 25 iShares ETFs. Seven are used in the Couch Potato Building Block portfolios. You can build a 10 Speed portfolio with only 3 commissions of $7.95. Your brokerage cost for a $30,000 account would be 0.08 percent.

Unfortunately, the iShares Emerging Markets ETF has an expense ratio of 0.72 percent. That’s way higher than the 0.27 on the Vanguard Emerging Markets ETF. Given the difference, you’d be better off buying the Vanguard ETF for any emerging markets investment over $1,767. (See what I mean about wrinkles?)

Other Brokerage Firms. You can build a Couch Potato portfolio at firms like TDAmeritrade, but your account will have to be large enough that the cost burden of 10 commissions won’t be a drag on performance. Ten commissions at $9.95 will cost $99.50 for each round of changes/additions. That’s 0.33 percent for a $30,000 account— but only 10 basis points or 0.1 percent for a $100,000 account.

The larger your account, the less you need to think about the cost of brokerage commissions. On a $100,000 account, for instance, those 5 transactions at Schwab would add 4 basis points or 0.04 percent to the 24 basis point or 0.24 percent cost of the underlying funds.

Using Vanguard Mutual Funds at Vanguard

Using Vanguard ETFs at Vanguard (or elsewhere)

Using Commission-Free Schwab ETFs at Charles Schwab

Using Commission-Free ETFs at Fidelity

Using Other Discount Brokers