It's that time again. Time to overcome sloth and indolence for a few moments and see how our Couch Potato portfolios did in 1999. You will recall that Couch Potato investors are lazy but not rude. We wouldn't, for instance, challenge professional investors and advisors by using darts to select mutual funds. Too callow. Too energetic.

No, we use an electronic calculator and divide our fortune into two equal parts, investing one half in an index fund such as the Vanguard 500 Index fund and the other half in a major bond index fund such as Vanguard Total Bond Market Index fund. Then, as Mickey Blue Eyes would say, we "fougettaboutit."

We let a year go by, perhaps devoting ourselves to margarita research, and then take out our dusty calculator once more so we can "rebalance" our portfolio back to a 50/50 mixture. For those with racy inclinations and a tolerance for higher math, we have the Complicated Couch Potato Portfolio. It uses the same funds but mixes them 3 parts equity fund to 1 part fixed income fund, a 75/25 mixture. This allows us to show off our mastery of fractions at cocktail parties.

So how did we do?

Pretty well considering that 1999 was the first year in the last five in which professional money managers actually beat the S&P 500 Index. And they did it rather impressively, too. The average domestic equity fund provided a return of 27.34 percent, a full 6.30 percent better than the S&P 500 index. While the Complicated Couch Potato has actually beaten the average domestic equity fund in 5 of the last 10 years, both portfolios got creamed this year, returning 15.61 percent (Complicated CP) and 10.16 percent (Simple CP).

Actually, that shouldn't be a surprise. Stocks are supposed to do better than bonds most of the time so an all-stock portfolio should do better than a mixed portfolio most of the time.

Measure the Couch Potato portfolios against their balanced peers, however, and both portfolios beat the average domestic balanced fund in 1999, just as they beat it over the last 3, 5, and 10 year periods. Performance figures are shown in the table below. In a roaring bull market, the 75/25 Couch Potato portfolio has been able to keep up with the average professionally managed equity mutual fund in all the longer time periods. The 50/50 Couch Potato has been able to beat the average managed balanced fund in ALL time periods.

The Couch Potato Portfolios Vs. Average Equity and Balanced Funds

Period Vanguard 500 Index Average Domestic Equity Average Domestic Balanced 50/50 Couch Potato 75/25 Couch Potato
1 year 21.07% 27.34% 8.53% 10.16% 15.61%
3 years 27.53% 21.11% 13.16% 16.60% 22.07%
5 years 28.49% 22.38% 15.76% 18.06% 23.28%
10 years 18.07% 15.43% 11.59% 12.94% 15.54%

Source: Morningstar, Scott Burns calculations

Still more striking is how the Couch Potato portfolios did against the largest balanced funds. The 75/25 Couch Potato beat the five largest in the last year, three-year, five-year, and ten-year periods. It also beat 24 of the 25 largest last years. (In fairness, a typical balanced fund is a 60/40 stock/bond mix so some of this out-performance is to be expected. The 50/50 Couch Potato was less successful for the same reason, but still beat 4 of the 5 largest last year. A table comparing the two Couch Potato portfolios with the five largest balanced funds is shown below. These five funds have over $90 billion in assets and dominate the balanced fund sector.

The Couch Potato Portfolios Vs. The 5 Largest Balanced Funds

Portfolio 1 year 3 years 5 years 10 years
75/25 Couch Potato 15.61% 22.07% 23.28% 15.54%
50/50 Couch Potato 10.16% 16.60% 18.06% 12.94%
Vanguard Wellington 4.41% 12.97% 17.36% 12.55%
Fidelity Puritan 2.86% 13.63% 15.46% 13.06%
Income Fund of America 0.52% 10.36% 14.86% 11.58%
Fidelity Asset Manager 13.59% 17.26% 16.52% 13.77%
Vanguard Asset Allocation 5.21% 18.87% 21.37% 14.80%

Source: Morningstar, Scott Burns calculations

The biggest surprise here is Fidelity Puritan. One of the most commonly held balanced funds in 401(k) accounts, this fund actually beat the S&P 500 Index in 1992, 1993, and 1994 but has been sinking against its balanced fund peers in recent years, ranking in the 78th percentile in 1999 compared to the 21st percentile over the last 10 years. Income Fund of America has been in the bottom half of all balanced funds over the last 5 years.

The bottom line: sloth, combined with callow indifference to the markets continues to be a good formula for investment success.