Sunday, January 31, 1999

Nothing succeeds quite like sloth.

This is one of the great secrets of investment life.

We are surrounded by believers in action and informed decision making. No one wants our money to be lazy. Everyone wants to help us gird for the angst of asset allocation, the stress of stock selection, and the blues of bond ownership.

Skeptics should consider their own mutual fund company. It doesnt matter which one or whether it distributes by load or no-load, help or no-help. Whatever its constitution, your mutual fund company spends millions to provide you with the value of your fund investments every day.

So you can make decisions accordingly.

Alas, we face a world of constant temptations to exert ourselves, to make decisions, to study this or that industry, or to select from a list of the 6 to 10 new mutual funds destined for fame and greatness, this week.

In fact, success in investing is inversely proportional to effort.

In the end it is sloth, indolence, and inactivity— not speed, brilliance, and due diligence— that succeeds.

Yes, dear reader, it is once again time for a report on the Couch Potato Portfolios, an investment "system" whose only requirement is that you be capable of fogging a mirror and divide by the number "2" with the support of a hand-held calculator. At its most complicated, you might choose to work with simple fractions like and , but that will only be to impress your friends and intimidate your enemies— and you wouldnt need to do it more than once a year.

The Basic Couch Potato Portfolio is simple and cheap. Take your money, divide it in two equal piles, invest one pile in the Vanguard Index 500 Fund (ticker VFINX) and invest the other in Vanguard Intermediate Term U.S. Treasury Fund (ticker VFITX). Then watch TV for a year, preferably evening sitcoms or other shows likely to render you intellectually inert. This strategy produced a return of 18.04 percent in 1998.

The Sophisticated Couch Potato Portfolio is just as cheap but involves fractions. In spite of this, the SCP can still be done in the privacy of your own home, without supervision from a Designated Financial Professional. Take your money, divide it into four equal piles, invest one pile in Vanguard Intermediate Term U.S. Treasury Fund, and invest three piles in Vanguard Index 500 fund. This method produced a return of 22.96 percent in 1998.

At the end of each year (or whenever you add new money) "rebalance" your portfolio back to the original proportions—- 50/50 or 75/25.

Thats it.

The payoff is in the results. Here are the figures:

Against the Entire Universe of Mutual Funds. For 1998 there were some 9,811 mutual funds in operation for the full year and their average return was 8.75 percent. The Basic Couch Potato Portfolio would have ranked number 1,926 in that entire universe. Thats the top 20 percent. The Sophisticated Couch Potato Portfolio would have ranked 1,305 in that universe, or in the top 13 percent. Against All Domestic Hybrid Funds. A universe of 690 funds that Morningstar characterizes as "domestic hybrid" funds had an average return of 12.09 percent. The Basic Couch Potato Portfolio ranked 127th or in the top 19 percent. The Sophisticated Couch Potato Portfolio ranked 44th or in the top 7 percent. Either way, sloth was in the top quartile. Against All International Hybred Funds. A universe of 76 funds that add international investments to their portfolios of domestic stocks and bonds had an average return of 8.24 percent. The Basic Couch Potato Portfolio ranked 17th or in the top 22 percent while the Sophisticated Couch Potato ranked 5th or in the top 6 percent. Against All Domestic Equity Funds. Although both Couch Potato portfolios had substantially less risk than all-equity portfolios because they held bonds as well as stocks, both Couch Potatoes did well against a universe of 4,431 pure equity portfolios. The average domestic equity fund produced a return of 13.41 percent. The Basic Couch Potato Portfolio ranked 1,603rd against some 4,431 domestic equity funds. Thats a rank in the top 36 percent. The Sophisticated Couch Potato ranked 1,141st or in the top 26 percent.

The Couch Potato Portfolios Top The Charts, Once Again

Fund Category 1998 Total Return Basic CP Rank Sophisticated CP Rank
Sophisticated Couch Potato (75/25) 22.96% NA NA
Basic Couch Potato (50/50) 18.04% NA NA
All Domestic Equity funds 13.41% 1603 of 4431 1141 of 4431
All domestic hybrid funds 12.09% 127 of 690 44 of 690
All mutual funds 8.75% 1926 of 9811 1305 of 9811
All International hybrid funds 8.24% 17 of 76 5 of 76

Source: Morningstar Principia Pro, December 31, 1998 data

This is not a fluke. This has been happening year after year. Good investment results come from being simple, cheap, and virtually inert. Columns detailing the origins, history, and results for the Couch Potato Portfolio are available on my website at: