Q. I’m wondering about a twist on the Couch Potato philosophy. I'm 60 and have been retired for ten years. My wife is 64 and we retired together. I have followed your Couch Potato investing strategy for most of my investing life, but I did go over to the Dark Side for several years, letting a manager handle our funds. I took back management of our retirement funds about a year ago and put us in various Couch Potato portfolios.
Here is my question: Is it OK to do variations on the portfolios? To be specific, we were in a Margarita portfolio, splitting our assets three ways. I have so little faith in foreign markets, however, that I prefer to invest principally in the US.
As a consequence, we are now in the classic two-part Couch Potato portfolio, having recently sold off our international stock investment. I would like to be more diversified, but in your Couch Potato strategies, foreign stocks are always the third asset class added.
Could I, for example, add in the energy index fund instead of the international stock asset? I believe the energy sector will take off over the next few years.
It would still be diversifying, using low-cost index funds, but would not be your recommended asset mix. I realize that the energy index fund would involve companies that hold international assets. —L.M., Dallas, TX
A. Interesting question. My favorite of the Couch Potato Building Block portfolios is Six Ways from Sunday. I like it because it has all the most basic asset classes— domestic and international equities, domestic and international bonds, real estate (REITs) and commodities as represented by energy companies. (A link to a webpage with “recipes” for all of the Couch Potato portfolios can be found here.) Like everything else in life, definitive answers are rare and we can have long discussions about each asset class.
But to answer your question directly, yes, I think you can bypass the international equity piece. One reason is that all the largest companies, whether domestic or international, are essentially global companies. As I have pointed out many times, Coca Cola is a quintessential domestic company that happens to earn the bulk of its profits overseas. Honda is a quintessential Japanese company that happens to earn the bulk of its profits in the United States. Since the domestic stock market now accounts for only about 40 percent of the global stock market, you will certainly be losing some amount of diversification by sticking with domestic equities— but it would be difficult to measure exactly what you are losing.
Similarly, I was reluctant to add REITs to the Couch Potato portfolios since most people are already very exposed to real estate because they own one or more personal homes. You have to be well up on the net worth scale before home equity isn't a major part of your net worth.
And some would argue that energy stocks are a poor proxy for commodities. Many learned researchers could make astute and interesting observations on the shortcomings of the Couch Potato portfolios. This is, however, an imperfect world. I believe that "Perfect is the enemy of good." The object of Couch Potato investing has always been to find the easiest way for anyone— absolutely anyone— to create a low-cost, tax-efficient and diversified portfolio "in his or her spare time, at home!"
We can all be very thankful that achieving this has gotten easier and cheaper, year after year. Today, we can create a very diversified portfolio at an average annual cost of no more than 0.20 percent. Our time commitment can be equally lean: no more than a few Internet minutes a year. This simplicity will provide better than average performance and it may do this because of lack of knowledge, not in spite of lack of knowledge.
At the same time, the financial services industry has yet to demonstrate that it can add any value at all, let alone the 1.0 percent to 3.0 percent in costs and fees that they routinely extract from our money.
The largest problem I see with your choice is that excluding an asset class is a form of future predicting. One of the basic principles of Couch Potato investing is that we don't know the future.