Q.   I write to ask for clarification on the Couch Potato portfolio.

I understood you to say buying Vanguard Total Stock & Total Bond will allow for regular re-balancing by selling the excess of one to adjust the deficit of the other.

Then I understood you to say a balanced fund such as Vanguard Balanced Index Fund (about 60/40 stocks/bonds) would not allow you to re-balance, because they are in one fund. But in the sales pitch for their Balanced Index Fund they claim to "maintain a fixed asset mix regardless of market conditions".

So here's the question: How can they do that without a sort of continuous re-balancing?? Else the one portion would get out of whack with respect to the other if for example, bonds stay flat and stocks soar.

If I like 60/40, wouldn't that get the job done, and raise indolence to a new high?

----B. H., Dallas (by e-mail)


A. Yes, Vanguard Balanced Index Fund will allow you to take indolence to the Next Level because Vanguard maintains a constant 60/40 mix that is common with many pension funds. It's also about midway between the 50/50 Couch Potato and the 75/25 Couch Potato portfolios that I report on regularly.

Investors who are in accumulation mode--- still saving and growing their nest egg--- are good candidates for Vanguard Balanced Index Fund because it simplifies the entire process of investment. It still gives them very good odds for long-term performance that beats most of the competition. Over the last 5 and 10 years, for instance, Vanguard Balanced Index has done better than 75 percent of its competitors.

Investors who are in distribution mode--- no longer saving and taking regular distributions from their nest egg--- may be better off with a two-fund Couch Potato portfolio. There are two reasons for this.

First, by having one fund for equities and another for fixed income, retirees who need to make an emergency withdrawal can make their withdrawals from the fixed income fund. So they won't be selling equities when stocks are down.

Second, retirees can reduce interest rate risk even further by substituting a "ladder" of safe Treasury securities for the fixed income mutual fund. If they build a 5-year ladder, for instance, it will be composed of 5-year Treasury securities that mature in 1, 2, 3, 4, and 5 years. They get the yield of a 5-year security but their average maturity is only 2 to 3 years. And if there is an emergency need for money, they can always sell the security with the shortest maturity. This, again, will reduce interest rate risk.


Q. We are in the process of "down-sizing" our house. I lost my job in January and my wife has taken a pay cut. I am 56. My wife is 51. We have about $900,000 in financial assets (401k's, IRAs, mutual funds) and our income is about $76,000 without touching the money in the market.

Renting, or buying, up to about $200,000 are our housing choices. If we buy, we are considering financing 80 percent of the value. Your thoughts? We hope to unlock about $350,000 of home equity. We hope to retire in 5 to 10 years.

---J.O., Irving, TX (by e-mail)


A. You've picked the right price for the new house: it fits with your current income. I suggest that you buy--- with one major caveat. If you assume a 5 percent mortgage for 30 years (it could be a 5/1 or other type loan) your mortgage, tax, and insurance bill will be about $1,300 a month. In the Dallas area you'll probably get more space and amenity from a $200,000 purchase than in a rental. You'll also have some modest tax savings. (Check the online calculator on my website to see how much and for how long.)

The caveat is that renting will be better if (1) a new job could mean an immediate move or (2) you don't buy the house with the intention of staying for at least five or six years. You need to like the house as your home rather than viewing it as a "stop-gap" event.

Buying and selling houses is expensive.