A Sloth’s Slick Progress

In November we celebrated the 20th anniversary of Couch Potato investing, the power of sloth and the opportunities gained by undiluted investment ignorance. If you missed the celebration, you are not alone. Our friends in major investment centers also failed to take notice. So did the talking heads on TV.

All are still wringing their hands around their cloudy crystal ball. They hope for a sign that will make them rich, preferably overnight. I say invest for what’s probable, not for what’s possible.

To be sure, thinking about the future is an interesting, if idle, exercise. It also pays a lot better than working at Walmart. But the reality is that you and I can do quite well without the great prognosticators. Year after year, decade after decade, the performance figures show that you and I can do better on our own.

How? We can do it investing in very broad and very low-cost index funds. Here’s the latest proof:

Last year was not a great year for investing. But if you had invested in the most basic Couch Potato portfolio, a 50/50 mix of the Vanguard (or equivalent) Total Stock Market index and the Vanguard Inflation-Protected Securities Fund, your return for the year would have been 7.18 percent. Domestic stocks didn’t do much for us but, thanks to our worrisome friends in Washington, inflation protected securities rocked, returning 13.24 percent for the year.

The Couch Potato portfolio would have beaten 98 percent of what Morningstar classifies as “moderate allocation” funds for the year. These funds, also called balanced funds, are typically 60 percent equities, 40 percent fixed income. The basic Couch Potato portfolio would have beaten 97 percent of “conservative allocation” funds—funds that are typically 40 percent equities, 60 percent fixed income. Over the last 5 years this simple approach would have done better than 97 percent of all moderate allocation funds and 91 percent of all conservative allocation funds.

This is not an annual occurrence. But superior performance isn’t a fluke, either. If you had invested $10,000 in the original Couch Potato portfolio with the mutual funds that were available 20 years ago— the Vanguard 500 Index fund and Vanguard Total Bond Market fund— your investment would have been worth $45,796 at the end of 2011. That’s a 4-fold plus increase. It’s a compound annual return of 7.9 percent —with no heavy lifting. If you had replaced the Vanguard 500 Index Fund with Total Stock Market Index Fund and Total Bond Market Fund with Inflation Protected Securities Fund as our tools evolved, your 20-year return would be somewhat higher.

Trust me, rebalancing was worth the effort. According to Morningstar data, the Vanguard 500 Index fund returned 7.71 percent annualized for the 20-year period. The Total Bond Market index returned 6.32 percent. Rebalancing worked to increase your return. It truly added value. Did that little bit of activity put you on top of the investing heap.


Read more about Couch Potato Investing here.


No, some managed funds did better. But most did not. Here are the names, ticker symbols, annualized returns and percentage ranking in deciles of some of the best known of those managed funds:

  • T. Rowe Price Capital Appreciation (PRWCX), 10.28 percent, decile 1
  • Vanguard Wellington (VWELX), 9.01 percent, decile 1
  • American Funds Income Fund of America (AMECX), 8.67 percent, decile 2
  • Fidelity Puritan (FPURX), 8.43 percent, decile 2
  • American Funds American Balanced Fund (ABALX), 8.37 percent, decile 2
  • GAMCO Westwood Balanced (WEBCX), 8.09 percent, decile 3
  • T. Rowe Price Balanced (RPBAX), 7.49 percent, decile 4

With only 79 moderate allocation funds surviving the 20-year period, Morningstar wisely limits ranking to deciles, so we can only estimate that the original Couch Potato portfolio would have done better than three of every four managed funds. This figure is consistent with multiple studies that have shown managed funds fail to beat their assigned index benchmark about 70 percent of the time.

Still tempted to pin your future on a rare winner? Then think a bit about the odds. When you try to select a winning manager your chance is about 1 in 4. When you take the index route you’ll come out ahead of 3 of 4 managed funds.