Sloth was a bit disappointing in 2009. The Couch Potato portfolios can usually be relied on to score in the top 25 percent to 30 percent of competing managed funds. But they had no edge in 2009.
Mind you, there were no disasters. It’s just that Couch Potato portfolios were real middle-of-the-road performers.
Even so, the recovery was lovely. The Margarita portfolio, created by following the proportions of a classic margarita, returned a handsome 25 percent in 2009.
Unfortunately, that was after falling 28.7 percent in 2008. If the near equal, but opposite, returns sound nearly balanced, don’t be fooled. It takes a 100 percent gain to recover from a 50 percent decline. In this case, the Margarita investor is still down nearly 11 percent.
Lots of portfolios are still down, of course. Worse, so much money shifted to bonds last year that many people locked in their losses. According to Strategic Insight, for instance, $400 billion went into fixed income, but only $6 billion went into domestic equities.
My bet is that jumping from stocks to bonds will be the equivalent of jumping out of the frying pan, into the fire. Shifting from equities to bonds is also unfortunate because the historical averages favor a further recovery this year. According to portfolio manager Patrick O’Shaughnessy, for instance, the S&P 500 returns an average of 15.4 percent in the second year of recovery after a bear market.
Time is on the side of Couch Potato investors. The longer you follow the Couch Potato path, the better things get. That’s because keeping more of your return has a way of working in your favor.
All five of these basic Couch Potato portfolios, for instance, did better than at least 75 percent of comparable “moderate allocation” funds over the last 5 years. Four of the five did better than 90 percent of them. If you compare them to “world allocation” funds— those whose charter has them invest some of their assets in international equities— the Couch Potato portfolios still do better than about 60 percent of their competition (See table below).
Over the last 5 years the annualized 4.14 percent return of the Margarita portfolio bested the returns of 4 of the 5 largest moderate allocation funds. American Funds Income Fund of America returned 2.72 percent. American Funds American Balanced Fund returned 2.02 percent. Fidelity Balanced fund returned 3.45 percent. Fidelity Puritan returned 2.74 percent. Only Vanguard Wellington did better. It returned 4.79 percent annualized for the period.
Previous Couch Potato reports have shown similar results again and again— the longer you invest, the greater the odds that your return will be higher the return on managed funds.
So let me make a suggestion: If you are nervous about the expense of managing your money, start an “Escape Road” account.
An escape road account is a small account to hold a core of basic index funds. It’s an account you can move your money to when disappointed by managers.
The 2009 Couch Potato Building Block Portfolios Report
his table shows the performance of 5 of the Couch Potato Building Block portfolios during 2009 and over the 5 years ending 12/31/2009. The Couch Potato Building Block portfolios are constructed using equal investments in from 2 to 10 index funds that represent major asset classes. Because international bond index funds have only been available for a few years, American Century International Bond fund was used to represent international bonds. Today, two exchange traded funds could replace it. The total expenses for these portfolios range from 0.19 percent to 0.34 percent, a fraction of the cost of typical managed funds.
|Portfolio||2009 Return||Percentile Rank
|Five Year Annualized Return||Percentile Rank (Balanced/World)|
|Couch Potato (2 funds)||19.89%||77/70||3.17%||22/61|
|Margarita (3 funds)||25.01||42/44||4.14||8/42|
|Four Square (4 funds)||20.04||77/69||4.22||7/40|
|Five Fold (5 funds)||23.49||54/53||3.93||10/45|
|Six Ways from Sunday (6)||25.19||41/42||5.88||2/32|
|Source: Morningstar Principia, 12/31/2009 data|
An inexpensive place to do this is Charles Schwab. It’s new family of exchange traded index funds (ETFs) can be purchased without commission so you can now start a basic 2 fund Couch Potato portfolio with a small investment in the Schwab U.S. Broad Market ETF (ticker: SCHB, expense ratio: 0.08 percent) and the Schwab Inflation Protected Securities mutual fund (ticker: SWRSX, expense ratio: 0.50 percent). Add Schwab International Equity ETF (ticker: SCHF, expense ratio: 0.15 percent) to make a Margarita portfolio and you’ll get more diversification while reducing your average expense.