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Scott Burns

The Evolution of the Couch Potato Portfolio

The only thing constant is change. This certainly holds true for the Couch Potato. 

Originally, over 20 years ago, the Couch Potato was created as a very simple portfolio by both design and necessity. Design required it be something anyone could do, including those without the vaguest interest in stocks and bonds. Necessity played a large role too—at the time there were only a handful of index funds from which to choose.

Vanguard, for instance, offered only 4 index funds. So the first Couch Potato portfolio was really simple: one-half Vanguard 500 Index funds for stocks and one-half Vanguard Total Bond Market Index for fixed income. (Treasury inflation-protected bond funds did not yet exist—nor did emerging market index funds. And, there were only two small cap index funds and one international fund.)

Today, we have a multitude of choices for index funds. And we can buy them either as traditional mutual funds or as exchange traded funds. It’s simple. It’s very inexpensive. It’s very tax efficient. And it’s likely to do better than at least 70 percent of its managed competitors.

Now, using the Building Block technique, you can build a portfolio with as few as two and as many as ten asset class ”blocks.“

We report on the trailing period performance of all Building Block portfolios each month. We believe they will continue to do what they were designed to do and provide simple portfolios for do-it-yourself investors. More important, their returns are likely to be better than the returns of most managed portfolios. Why? It’s simple. Managers have an exaggerated view of the value they add and charge accordingly.

A nagging question still remains.

Can Couch Potato portfolios be ”tweaked“ for better performance and less risk?

Yes. That’s what we created AssetBuilder to do.

First, we searched for index funds that matched our applied science to investing. It wasn’t easy. But, we found them with Dimensional Fund Advisors, a much-respected shop with deep footings in the best academic research. Yet, the funds are only available to institutional investors or through registered investment advisors. They cannot be purchased “retail” like index funds.

Second, we used mean variance optimization to get as close as possible to providing the highest return for any given amount of risk. It’s more complicated than dividing by a number between 2 and 10 to get your asset allocation. The formula can be quite mind-boggling. In fact, just talking about mean variance optimization is a good way to empty a room.  That said, it’s clearly not a ”home brew“ portfolio tool.

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