The Evolution of the Couch Potato Portfolio
The only thing constant is change – that includes Couch Potato investing. When Scott created the first Couch Potato portfolio nearly 20 years ago it was 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.
But 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. As the index fund market expanded, Scott began to update and expand the Couch Potato portfolio.
It’s still simple. It’s still very inexpensive. It’s still very tax efficient. And it’s still likely to do better than at least 70 percent of its managed competitors. Using the Building Block technique you can now 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 the Building Block portfolios each month. We believe they will continue to do what they were designed to do – provide simple portfolios for do-it-yourself investors. More important, their returns are likely to be better than the returns of most managed portfolios. There is a simple reason for this: managers have an exaggerated view of the value they add and charge accordingly.
But a nagging question remains.
Can the Couch Potato portfolios be “tweaked” for better performance and less risk?
That’s what we created AssetBuilder to do.
First, we searched for index funds that provided better returns than Vanguard index funds. That isn’t easy. But we found that Dimensional Fund Advisors, a much respected shop with deep footings in the best academic research, offered just that. Unfortunately, the funds are only available to institutional investors or through registered investment advisors. They cannot be purchased “retail” as Vanguard funds can.
Skeptical? We were too. So check out our Why DFA page. It gives the returns for Vanguard compared to DFA.
Second, was to use mean variance optimization to get as close as possible to providing the highest return for any given amount of risk. Its more complicated than dividing by a number between 2 and 10 to get your asset allocation. Just talking about mean variance optimization is a really good way to empty a room, so it’s clearly not a “home brew” portfolio tool.
That’s what we do at AssetBuilder. We’re absolutely certain that our portfolios aren’t perfect, but MVO is the best tool currently available.
Why are we so confident?
For all the right, Couch Potato-like reasons! Low costs to you and improved risk efficiency.
