It's that time of year. Time to put our 24/7/3-piece wardrobe (bathing suit, t-shirt, and flip-flops) into a bag, squeeze the last of the limes, and empty the tequila bottle.

Time to leave Margaritaville and hop a plane back to civilization. Time to practice Couch Potato portfolio management.

The visit will be brief, of course, since Couch Potato Portfolio managers don't have much to do. The requirements, as you may recall, are minimal.
  • You must be capable of fogging a mirror.
  • You must demonstrate possession of a pulse.
  • You must be able to divide by the number "2" with the aid of a calculator.
  • You must be massively indifferent to virtually anything you see on TV or, for that matter, market information of any kind.
  Then--- and only then--- are you ready for the rigors of Couch Potato Portfolio management.

  How did we do this year?

Well, let's put it this way--- it's good we have a simple wardrobe. We only lost our T-shirt. Others have been debilitated, devastated, and defibrillated.

The traditional Couch Potato Portfolio---- 50 percent Vanguard 500 Index fund and 50 percent Vanguard Total Bond Index fund--- lost 6.95 percent in 2002. The aggressive 75/25 Couch Potato, which is 3 parts Vanguard 500 Index and 1 part Total Bond Market Index, lost 14.55 percent. (Think of the 3:1 ratio as a grotesquely wet martini.)

The 50/50 did somewhat better than the average managed balanced fund but the 75/25 did worse. Both Couch Potato portfolios did better than the average domestic equity fund. Indeed, the 50/50 Couch Potato ranked 462 against a field of 7,052 domestic equity funds--- in the top 7 percent. The 75/25 ranked 1,281--- in the top 18 percent.

The comparison isn't fair, of course, since the equity funds aren't balanced with bonds. Potentially, stock funds could have much better performance. Then again, take a look at the figures. At three, five, and ten years the Couch Potato Portfolios beat the average domestic equity fund. At 15 years, the Couch Potato portfolios do nearly as well or slightly better. Whatever the time period, they achieve results with far less risk.

Over the last 15 years, the 50/50 and 75/25 Couch Potato Portfolios would have ranked in the top 24 and 15 percent of balanced funds, respectively. Measured against large blend equity funds they would have measured in the top 50 and 33 percent, respectively, with far less risk. As I've pointed out many times, sloth and indifference regularly beat sincere efforts supported by serious fees.

  
The Couch Potato Portfolios vs. Balanced and Domestic Equity Funds
Time Period 50/50 75/25 Avg. Balanced Avg. Domestic Equity
12 months (6.95) (14.55) (9.56) (22.77)
3 years (2.58)    (8.58) (3.80) (11.51)
5 years    3.99        1.84   0.62 (0.37)
10 years    8.81        9.16   7.41        7.80
15 years 10.22    10.88   9.23    10.43
Source: Morningstar Principia, 12/31/02 data
  

Could we improve Couch Potato performance?

Yes, slightly. When we started this exercise the only index funds with any history were the Vanguard 500 Index and Vanguard Total Bond Index. Today, there are 685 index funds--- as many index funds as the entire fund industry had funds in 1981. As mentioned quite a few times in the last few years, Vanguard Total Market Index would add small and mid cap stocks to the mix. This would dilute (somewhat) the heavy concentration on gigantic stocks that comes with the 500 Index. So far the difference has been miniscule--- but history favors a small but beneficial improvement in performance.

Is the Couch Potato the Ultimate Mutual Fund?

Absolutely not. You'll never find the Couch Potato Portfolio at the top of a performance list. You'll also never find it at the bottom of a performance list. What it will do for you is provide somewhat superior performance with modest risk. That makes it a great portfolio to know about if you've been disappointed by all those who sell the sizzle of superior performance--- but deliver disaster.