Allow me to introduce the Couch Potato Portfolio, a surefire formula to invest your money, enjoy a return that will put you in the top half of all professional investors, but expend virtually no effort or thought.
Better still, your portfolio will have about HALF the ups and downs of stock investors, and you can achieve this without benefit of an MBA, CFA, or other professional designation. ( Think of the tuition savings!)
In fact, you need to pay attention to your investments only once a year.
Any time it's convenient. Anytime you can muster the capacity to divide by the number "2".
- no complicated accounts
- no diligent reading of the financial press
- no phone calls from brokers with opportunities<
- no meetings with investment advisors demonstrating their constant supervision of accounts.
- and very simple tax returns.
It also means more time at the beach, if you are so inclined. Or more time being a couch potato.
How is it done?
By putting half of your money in a common stock fund that mimics the Standard and Poors' 500 index. And half of your money in a fund that mimics the Shearson Lehman index for intermediate maturity bonds. As an alternative, you could build a "ladder" of U.S Treasury notes that mature in 2 to 7 years. Then, once a year, you "rebalance" the portfolio by transfering enough from stocks to bonds (or vice versa) to make the portfolio 50/50 again.
How do you do that? Divide by "2". If you started the year with, say, $20,000 that was $10,000 in stocks and $10,000 in bonds but ended with a total of $23,000, you start the next year by making sure you have $11,500 in stocks and $11,500 in bonds. Then you quit for another year.
Perhaps. But following such a plan will do what you want: provide an attractive long term return with less volatility than a 100 percent stock portfolio but a higher return than a bond or CD portfolio.
To see how the portfolio performed, I used software and data from Dimension Funds Advisors, a California investment consulting firm started by Rex Sinquefield. Mr. Sinquefield is one of the leading gurus of portfolio performance. The software allows you to compare historical performances of differently composed portfolios.
So I picked January, 1973 as a starting point just to be nasty and difficult.
That meant stocks were going into the worst bear market of the post–war period, followed by the bear market of 1982, and the crash of 87'. Bonds, during the same period, saw interest rates rise to a historical peak— with the attendant collapse in bond prices. Then rates fell and prices soared.
How did the Couch Potato Portfolio do?
Try 10.29 percent, compounded annually. A portfolio that was 100 percent invested in stocks would have provided an annual return of 10.56 percent, only 0.27 percent better. Here are the figures:
- 500 Index 10.56 percent
- CP Portfolio 10.29
- All Int. Bonds 9.40
- Inflation 6.58
During this same period if you had invested 100 percent in stocks, you would have seen your portfolio drop by 26 percent in 1974 alone and by 37 percent in the first two years of investing. Some people experienced that and never came back.
The worst performance for the couch potato portfolio was a loss of 10 percent in 1974 and a cumulative loss of 15 percent in the 73-74 bear market.
The end result is that $10,000 invested in stocks would have grown to $60,900 while $10,000 invested in the Couch Potato portfolio would have grown to $58,300.
The difference is a small price to pay for 17 years of good sleep.
Still more impressive is how the Couch Potato Portfolio performed when measured against all common stock mutual funds with ten year track records. From June, 1981 to June, 1991, the Couch Potato Portfolio provided a compound annual return of 14.18 percent, outperforming more than 60 percent of the 338 funds with 10 year histories. In other words, with substantially less risk, fewer ups and downs in portfolio value, and absolutely no heavy lifting, the Couch Potato Portfolio did better than most workaholic professional portfolio managers.
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.