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SNov 18, 2011

Couch Potato Investing Turns 20

Scott Burns
Couch Potato Investing Turns 20

This is a birthday celebration. Couch Potato investing is 20 years old! I introduced it in a September 1991 column. If you have not followed this seismic innovation, it is investing as the Big Lebowski would do it— except we didn’t have the inspiration of the movie until 1998.

Had you adopted the Couch Potato philosophy at the beginning of 1992 an original $10,000 investment would now be $42,360, a compound annual return of about 7.49 percent. (I say “about” because that’s the value at the end of October, not a complete 20 years. It could be higher, or lower, by December 31st.) Had you followed the slow evolution of improved index fund offerings, your original investment would now be about $43,150, providing a slight improvement in return. Both returns would, I estimate, put your performance in the top 25 percent of all surviving managed balanced funds.

Whether you stuck with the original Couch Potato or modernized along the way, your investment would have quadrupled in value. All you had to do was take your inspiration from the Big Lebowski: Do as little as possible.

And what, exactly, is as little as possible?

Well, first you would use an electronic calculator and divide the value of your portfolio by the number two. Then you would rebalance your portfolio, moving money between a low-cost index fund that invested in stocks to another low cost index fund that invested in bonds, or vice versa. When you had equal amounts in both funds, you were rebalanced.

That’s it. Done for the year.

When discussing performance, it’s also worth emphasizing a word: “surviving.” Large numbers of managed funds have been quietly buried over those 20 years, part of the inevitable churning of assets that accompanies the unending sales effort of the financial services industry. It’s a cost of doing business for them, but it’s bad for you and me. So the real performance is significantly better than the top 25 percent.

This attractive performance is no fluke. Over the last twenty years I have regularly reported on Couch Potato investing. The results have consistently shown that investing equal amounts of money in low-cost index funds will provide a better return than about 70 percent of managed funds. At the end of the third quarter, for instance, the 5-year return of the basic Couch Potato portfolio would have put it in the top 4 percent of moderate-allocation balanced funds, according to Morningstar data. This is an unusually good performance and it happened during one of the worst periods in market history.

Think of the time and angst you might have saved!

These blunt realities are the reason I haven’t written a column interviewing a bright and articulate fund manager in years. The low-cost index fund investing introduced by John Bogle has proven itself again and again. Today, the burden is on the financial services industry to prove they are worth spit, compared to this very simple alternative.

But let’s focus on the good news.

  • Today, we know it is safe and beneficial to ignore the financial services industry come-ons.
  • Today, Couch Potato investing is easy. It wasn’t easy 20 years ago. Today, Vanguard isn’t the only provider of index funds.
  • Today, we can buy and sell low cost exchange traded index funds on any brokerage platform.
  • Today, if you pick your ETF/brokerage platform carefully you may be able to avoid any discount brokerage commissions as well as enjoy low annual expenses for the funds.
  • Today, if you have a 401(k) or 403(b) plan through your employer you can avoid the expensive managed funds on your plan “menu.” Instead, you can open a brokerage “window” to access the world of low-cost exchange traded funds.
  • Today, your total investment expense can be well under 0.2 percent a year. This may increase your retirement nest egg by tens of thousands of dollars.

What will going Couch Potato do for you? Lots. While you are saving, for the future it will increase the amount you accumulate by the time you retire. And when you retire, it will reduce the risk that you will run out of money.

That would be a good thing, a very good thing.

Filed Under: Couch Potato Investing