Its not easy being lazy, but it pays pretty well..

If youre a true couch potato investor you havent been sitting on the edge of your chair waiting breathlessly for the latest report on the Couch Potato Portfolio. Youre doing something more useful, like thinking about new ways to get Aadvantage Miles without actually spending money.

Active anticipation isnt part of the Couch Potato Way. Simplicity is.

*For all you striving non-couch potato types, I have some bad news: even in the last sizzling 12 months, the Couch Potato Investor has easily beaten more than half of all the strivers. (See table 1.) *

What is the Couch Potato Portfolio?

We divide our money to be invested by two and put half in a common stock index fund and the other half in an intermediate bond fund. As a result, we received a total return of 23.7 percent over the year. To get the same return in a balanced fund that invests in pretty much the same thing we would need an MBA degree, quite a few years of experience, and an obsessive, driven personality that has trouble going to the beach. If we had all those things, we had about a fifty percent chance at that 23.7 percent return because that was the average return for all 367 balanced funds in the Morningstar fund universe.

Table 1.

Whatever The Time Period, The Couch Potato Does Well To Better

Period 75/25 CP 50/50 CP Avg. Growth &

Income

All Dom. Equity Fund Avg. Balanced
15 years 16.5% 14.4% 15.5% 15.7% 14.2%
10 years 13.4 11.9 12.6 13.2 11.3
5 years 17.0 13.3 18.6 19.0 13.4
3 years 24.2 18.7 25.7 24.9 18.1
1 year 31.9 23.7 36.0 32.7 23.7

Sources: Morningstar Principia; Dimensional Funds Advisors "Returns" software

Similarly, a passive portfolio that is three parts stocks, one part bonds will be in the top 20 to 25 percent of all funds. A passive portfolio that is one part stocks, one part bonds will be in the top half to top one third.

The most telling statistic here is from the 15 year period beginning October, 1982. Although the last 15 years were the very best 15 year period for equities in history, a 75 percent stocks Couch Potato portfolio still beat the average domestic equity fund while subjecting the investor to less risk and requiring absolutely no thought.

Table 2.

How The Couch Potato Portfolios Rank Against All Funds

Period No. of funds 75/25 Rank 50/50 Rank
15 years 610 160 301
10 years 1,503 320 513
5 years 2,980 843 1,225
3 years 5,593 1,029 1,811
1 year 8005 1,753 2,874

Sources: Morningstar Principia; Dimensional Funds Advisors "Returns" software

Which leads us to an interesting question. If the Couch Potato Portfolio started as a simple 50/50 deal, why am I reporting 50/50 and 75/25?

Because the public portfolio a composite of all our holdings has changed. When I started writing about fool-proof portfolios about ten years ago, our collective portfolio was about 50/50 stocks/bonds.

Now were all heavily into stocks.

You can get a good idea of just how heavily weve moved toward stocks by examining the assets held in major fund categories tracked by the Investment Company Institute, a Washington organization supported by the mutual fund industry. ( see table 2)

Year

Equity Funds

Bond and Fixed Income Funds

1987

39.8%

60.2%

1988

41.2%

58.8%

1989

45.0%

55.0%

1990

43.2%

56.8%

1991

48.3%

51.7%

1992

47.5%

52.5%

1993

49.6%

50.4%

1994

55.9%

44.1%

1995

61.4%

38.6%

1996

66.4%

33.6%

Aug-97

69.6%

30.4%

Source: Investment Company Institute

As you can see, the broad pattern has reversed in the last ten years. The leap into equities is, if anything, understated, because the "bond and income fund" category includes a variety of funds with heavy equity holdings.

Where should you be if you are a new Couch Potato?

Its up to you but dividing by two is always easier than doing fractions.

Questions about personal finance and investments may be sent to: Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas 75265; or faxed to (214) 977-8776; e-mail to scott@scottburns.com. Check the website: www.scottburns.com. Questions of general interest will be answered in future columns.