The only thing constant is change---that includes Couch Potato investing. When I 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, I 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. I 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 the links below to download our research and data sources. The shortest (and least academic) comes from Don Phillips at Morningstar. He found, in 2005, that the ten year average total return on DFA funds was 12.37 percent while the comparable figure for all index funds was only 8.94 percent. That’s a handsome difference, a difference that could provide a significant upgrade to any retirement.

The Duke University study, using several approaches, also showed a significant advantage for using DFA funds over Vanguard funds. The advantage was a minimum of 1.19 percent a year.

Second, was to use mean variance optimization to get as close as possible to providing the highest return for any given amount of risk. Trust me, its way more complicated than dividing by a number between 2 and 10 to get your asset allocation. Just talking about MVO 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. We’re confident that time will show that our model portfolios will provide higher net returns with less risk than the vast majority of asset managers.

Why are we so confident? For all the right, Couch Potato-like reasons! Low costs to you and improved risk efficiency. We’re not predicting the future; we’re just offering the most efficient vehicle for market returns.

Supporting Links:

Don Phillips, “Indexing Goes Hollywood”



Duke University: “DFA versus Vanguard: Has DFA Outperformed Vanguard by Enough to Justify its Advisor Fees?”

Our monthly posting of Couch Potato and AssetBuilder portfolio returns



Our monthly updated growth of investment chart, comparing AssetBuilder model portfolios with major indexes



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