Sloth lost some ground last year, no matter how little it did.

This is a matter of importance for the Couch Potato Portfolios because they require perfection in slothful habits. Management effort should not exceed the ability to fog a mirror. If you are called upon to divide by the number 2, an electronic calculator will be provided.

Nothing else is asked. Nothing else is allowed.

You divide your money in half and put one pile in the Vanguard Index 500 fund and the remainder in the Vanguard Total Bond Index fund. You exercise sublime trust that cheap and simple are as good as old age and treachery when it comes to beating youth and purported skill.

The 50/50 Couch Potato returned 1.17 percent last year, slightly better than the minus 0.23 percent of the average domestic equity fund. The more adventurous 75/25 Couch Potato (75 percent Vanguard Index 500, 25 percent Vanguard Total Bond Index) trailed the average domestic equity fund with a disappointing minus 3.95 percent return.

An indifferent year, at best.

Fortunately, a single year means nothing to a true Couch Potato. Preferring to remain virtually comatose through entire election cycles, the Couch Potato knows his performance will improve by sheer tenacity of torpor.

And that's exactly what the long-term results show.

Over the last three years, both the 50/50 and 75/25 Couch Potato portfolios trailed the average domestic equity fund by a smidgen. But over the last five years (one full election cycle) both the 50/50 and 75/25 Couch Potato portfolios did better than the average domestic equity fund.

Investing for ten years, the 50/50 Couch Potato trailed the average domestic equity fund slightly (14.14 percent to 15.62 percent) while the 75/25 Couch Potato had a small advantage (15.80 percent to 15.62 percent). (The figures and standings are shown in the table below.)

The Couch Potato Portfolio Do Well, Once More

Period 50/50 CP 75/25 CP Avg. Dom. Equity Fund 50/50 Rank among equity funds 75/25 Rank among equity funds
1 year 1.17% -3.95% -0.23% 2,413 of 5,662 3,210 of 5,662
3 years 9.99 11.26 11.43 2,183 of 4,166 1,875 of 4,166
5 years 15.39 16.94 14.79 1,100 of 2,544 837 of 2,544
10 years 14.14 15.80 15.62 535 of 824 397 of 824

Source: Morningstar Principia, December 31, 2000 data

All this might deserve the faintest of praise if you ignored the massive differences in risk. According to the Morningstar database, the average domestic equity fund was a glutton for risk, whomping up a standard deviation of 24.90 percent over the last three years. In other words, the ups and downs of the fund were more than twice as great as its actual return. The same measure for the 50/50 portfolio was only 10.38 percent while the 75/25 portfolio had a standard deviation of 15.12.

In other words, the Couch Potato Portfolios provided competitive returns in all time periods with a fraction of the risk taken by the typical managed fund. In effect, the cheap and simple solution was competing with one arm tied behind its back.

So lets examine how the Couch Potato Portfolio performed when measured against managed portfolios with about the same amount of risk. To do this, I found the average managed bond fund return and averaged it, 50/50, with the average managed domestic equity fund. Then I compared it to the 50/50 Couch Potato for the last year, three years, five years, and ten years.

The result?

While the managed portfolio beat the 50/50 index portfolio last year, 2.70 percent to 1.17 percent, the managed portfolio lost over all the longer periods. The managed portfolio earned at a 7.61 percent annual rate over the last three years compared to 9.99 percent for the Couch Potato; over the last five years the managed option lost 9.97 percent to 15.39 percent for the Couch Potato; and over the last ten years the managed option lost 11.54 percent to 14.14 percent. (It should be noted that these figures are not adjusted for commissions or taxes, both of which would make the managed funds look worse.

Long term, the annual difference means a lot to the size of your portfolio. Invest $10,000 at 14.14 percent and you'll have $37,530 at the end of 10 years; earn 11.54 percent and you'll have only $29,806.

Bottom line: simple and cheap continues to be a proven, winning formula. It's the managed world that needs to prove its worth.

(Readers who would like to learn more about the history, development, and earlier performance of the Couch Potato Portfolio--- including the use of broader index funds than the Vanguard Index 500 fund--- click here )