Couch Potato investors trumped the big dogs again! In 2014, the basic Couch Potato Portfolio, a 50/50 mix of two low-cost index funds, returned 8.16 percent while the Morningstar average for all “moderate allocation” funds was only 6.21 percent.
Even more impressive than the nearly 200-basis-point advantage, the added return was gained while having less portfolio volatility. That’s the ups and downs that can fill you with fear, not to mention being hard on your tummy. Adjusted for what statistical types call volatility risk, the Couch Potato triumph was even greater. Couch Potato investing can mean more return, less angst.
At this point, you may be wondering how you can become a Couch Potato investor. Fortunately, the requirements haven’t changed since I introduced the original Couch Potato portfolio nearly 25 years ago.
Do you have a pulse? To check this, put your index finger to your jugular vein. If you experience a slight throb, you have a pulse.
Can you divide by the number “2” with an electronic calculator? This is not a trick question. You won’t be expelled if you admit to having a hand calculator. All we’re concerned about is that you have a way to divide something in half that isn’t a chainsaw.
Do you have money to invest? Sadly, this is where we lose most Couch Potato investors. There is a sad truth here: millions of people still don’t understand that you must actually have some money before you can earn a return on it.
Fortunately, the money requirement has been minimized in the last five years. Years ago, you had to invest in Vanguard index mutual funds. They required a minimum initial investment of $3,000 per fund. So you needed $6,000 of starting cash.
But today, you can buy the equivalent investments as exchange traded funds, commission free and with no minimum investment. (But do be reasonable.) You can do this on many low-cost platforms: think Fidelity, Schwab and Vanguard.
Today, the only thing between you and becoming a successful Couch Potato investor is self-doubt. That self-doubt is usually created by somber statements from purported professionals who like to say, “Would you do brain surgery on yourself?” The implication is that investing is really complicated. Years of training are required.
But another question is more to the point. Do you drive a car? If you do, you can manage your own money. I drive a car. The only part of my car manual I have read is about Bluetooth connections. I can’t tell you exactly how my car works, either. You name it: fuel injection, disc brakes, power steering, automatic transmissions, stability control, front-wheel drive. I’ve heard of them. But the worst thing that could happen to a car I owned would be for me to raise the hood.
I’d suggest honking if you agree, but the noise would be deafening.
This is important. It is not necessary to be an expert to be functional. Follow some basic instructions and your car will get you from A to B. Yes, we see some very non-functional people on the roads from time to time, but we’ve learned to avoid them.
So it is with managing your savings. We can use the Couch Potato portfolio, confident that it will deliver us to retirement. And just as we avoid the jerks who speed on our roads, we should do the same with people who think they have faster ways to get us to retirement.
“That sounds good,” you might say, “but is it a fluke?” Nope. Recall I introduced this idea nearly 25 years ago. And while there have been a few years that were disappointing, there have been no disasters. Better still, the more investing costs fall, the bigger the advantage for Couch Potato investors. Today, you can do a basic Couch Potato portfolio for an average annual cost of as little as 0.05 percent.
At that rate, it will be 24 years before your cost of investing will equal the typical 1.20 percent annual expense of a managed mutual fund. It would be another 20 years before you’d spend what you’ll spend in one year on a one percent adviser wrap fee.
At the far extreme, you could manage your money as a Couch Potato for 65 years before you’d pay as much as a single year costs for a variable annuity with a living benefits rider.