Tuesday, May 4, 1999

Suppose you had been a practicing Couch Potato Portfolio investor, where would you be?

No, I am not talking about compound annual rate of return. Nothing so abstract. Where would you be in greenbacks?

The question came to mind as I contemplated the incredible seven fat years weve had since the introduction of the Couch Potato, er, Concept. As some readers will recall, the original idea of the Couch Potato was modest: create a portfolio that could be followed by anyone capable of fogging a mirror, including those who think beer is a breakfast drink. It would also, however, have to do reasonably well in up markets and down markets so that no one ever got to feel they had been "left out" while everyone else was becoming ridiculously rich.

Since the Couch Potato Portfolio was introduced in late 1991, I assumed the investor needed a few months of deep thought before plunging in January 1992. At that time they took out their calculator, divided their original investment by the number "2", and invested half in the Vanguard 500 Index fund. The other half went in the Vanguard Total Bond Market fund. In every succeeding January, they did the same thing and "rebalanced" back to a 50/50 mix. Later, the Complicated Couch Potato Portfolio was introduced, the one where you invested 3 parts equity fund to 1 part Bond fund. It helps, in following this recipe, if you have had experience making frozen orange juice.

Complexity not withstanding, the 75/25 was closer to reflecting how we all were investing.

Here are the results with a starting investment of $10,000 in January 1992:

Seven Years of Indolence and Sloth

Dom. Bal. Dom.Eq. S&P500

1992

$10,778

$10,998

$10,742

1993

$11,992

$12,471

$11,804

1994

$11,663

$12,314

$11,935

1995

$14,616

$16,216

$16,405

1996

$16,569

$19,447

$20,155

1997

$19,712

$24,231

$26,849

1998

$22,188

$27,721

$34,533

Q1 99

$22,414

$27,987

$36,253

Source: Morningstar Principia Pro, author calculations

As you can see, the original 50/50 Couch Potato beat the average domestic balanced fund. As you might expect from a booming bull market, it trailed the average domestic equity fund. The 75/25 Couch Potato, however, beat the average domestic equity fund. Basically, youve got 2 to 3 times as much money as you had in 1992.

No one, however, just likes to beat an average. So I asked another question: how did the 50/50 Couch Potato do compared to the ten balanced funds investors were most likely to buy if they sought advice? Or the ten equity funds investors were most likely to buy if they sought advice?

The results are shown below. The 50/50 Couch Potato beat 8 of the 10 balanced funds. The 75/25 Couch Potato beat only 4 of the most popular load equity funds, largely because it was 25 percent invested in fixed income. If the portfolio had been 82 percent equities, it would have beaten 9 of the 10. It could not have beaten Putnam New Opportunties, A shares, because the Putnam fund beat the S&P 500.

Couch Potato Portfolios vs. Real Competitors

Fund End Value
Putnam New Opportunities A $42,375
Putnam Voyager A $31,773
IDS New Dimensions A $31,594
Washington Mutual Investors $31,545
Fundamental Investors $31,487
Growth Fund of America $30395
75/25 Couch Potato $30,024
Putnam Fund for Growth & Inc. A $29,269
Investment Company of America $28,668
MSDW Dividend Growth Secs. B $28,102
Avg. Domestic Equity fund $27,987
AIM Constellation A $26,735
AIM Balanced A $26,257
Colonial A $25,269
50/50 Couch Potato $24,889
George Putnam of Boston A $22,992
MFS Total Return A $22,895
American Balanced $22,471
Avg. Domestic Balanced Fund $22,414
Merrill Lynch Capital A $22,319
Merrill Lynch Capital B $21,904
IDS Mutual A $21,859
Kemper Total Return A $20,221
Franklin Income A $19,205

Source: Morningstar Principia Pro, author calculations; the equity funds are in italic.

Conclusion?

So far, time has shown simple, passive investing to be a very competitive idea.

Next Tuesday: The Couch Potato Portfolio Is Discovered In New York!