New Years Eve has gone by. So has Valentines Day. Every publication in America has issued its year-end investment review and its thoughtful analysis of what to expect for 1995. Most of us have concluded that if we had just $1 for every word of investment advice available to us, we wouldn't need any investment advice. We'd be rich.
So it's time for the Couch Potato Review of 1994. Here it is:
Some people made money. Most people lost it. Basically, 1994 was a miserable year.
How miserable? When you have a total of 4,638 mutual funds in business for the entire year and only 889 of those funds make money, it's not a good year.
Which brings us to Couch Potato investing. Ignore interest rates, p/e ratios, foreign trade, and Congress. Don't plead ignorance. Cultivate it. Revel in your sublime disconnection.
Because it won't hurt you. Skeptics should consider the ongoing performance of the Couch Potato Portfolio, an investment program based on the assumption that your greatest accomplishment in mathematics is being able to divide by the number two... if you aren't asked to do it too often.
Specifically, you put half of your money in a broad index of U.S. stocks such as the Standard and Poor's 500 index. Then you put the other half in a broad fixed income index such as Lehman Brothers Intermediate Bond Index. Then you "rebalance" the portfolio once a year.
Rebalancing is NOT the tricky part. You rebalance by dividing the sum of all your investments by two and then moving some money from stocks to bonds or vice versa so that you start the new measuring period with 50 percent stocks, 50 percent bonds. That's it. The entire secret of Couch Potato finance in a nutshell.
In 1994 the Couch Potato Portfolio returned minus 0.4 percent, a performance that would have ranked number 1,017 of the 4,638 funds with full year performance records. That's a position in the coveted "top quartile", the 25 percent of all funds that tend to get all the new money. Over the last ten years the same technique would have ranked 306th of 770 funds; over the last fifteen years it would have ranked 195 of 415 funds. The table below shows the performance of the Couch Potato Portfolio against a variety of alternatives and time periods:
Here's the same portfolio compared to the entire universe of mutual funds that invest in diversified U.S. equities:
With far less price volatility, the Couch Potato portfolio has provided a return close to the return of the average equity fund.
"Yes, but...", you might say, "how do I put that into practice?"
By using index funds. The Vanguard Group, the second largest of the no-load fund complexes, now has some $30 billion in index funds. The Vanguard Index 500 fund duplicates the performance of the Standard and Poors' Index and the Vanguard Total Bond Market Index duplicates the performance of the total bond market. ( You might use the Vanguard Intermediate Treasury Index fund as a substitute. I used the Total Bond Market Fund in this exercise because it has the longest track record.)
With a minimum of $3,000 a fund in a taxable account and $500 a fund in IRA accounts, you could start a Couch Potato portfolio for as little as $1,000 in an IRA or $6,000 in an account that wasn't tax deferred. No load. And the cost of managing your money would be about 0.2 percent a year, a saving of about 1.1 percent a year over the average balanced fund. ( For more information call Vanguard at 800-662-7447.)
How would you have done?
Consider these figures for annualized return over the last 5 years, all done without benefit of annual rebalancing:
A $1,000 IRA investment in the Index 500 fund would have grown to $1,503.59 while an identical investment in the Total Bond Market Index fund would have grown to $1,432.52 for a Couch Potato total of $2,936.11. That would also mean, by the way, that at the end of 5 years the portfolio would be 51 percent stocks; 49 percent bonds--- no compelling need to do the heavy work of dividing by two and "rebalancing".
Finally, how did we do relative to inflation? The Couch Potato returned 7.98 percent while inflation was rising at an annual rate of 3.49 percent. That's a real return of 4.49 percent a year--- more than most prudent men dare to hope.
Couch Potato Investors have a nice choice. They can say, "Ignorance is bliss" with a straight face. Or they can say it with a smile.
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.
AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.