Investor, throw that Zoloft crutch away! Embrace the healing power of the Couch Potato.

When it comes to investment worries, the Couch Potato Portfolio may be a better treatment than Zoloft, Paxil, or Prozac, the three top selling anti-depression drugs. That conclusion comes from examining the trailing returns for the original Couch Potato Portfolio from 1999 to the present.

If you were a traditional Couch Potato investor--- which means you put your money in the original Vanguard 500 Index fund and Vanguard Total Bond Market Index fund--- your return for 2003 was 16.24 percent for the 50/50 portfolio or 22.38 percent for the more aggressive 75/25 portfolio.

Either way, 2003 was a big relief. Returns for the updated Couch Potato portfolio, which substitutes the Vanguard Total Market Index fund for the original Vanguard 500 Index fund, were even better. (See tables 1 and 2 for complete returns data.)

What really got my attention, however, was the power of simple diversification. If you could fog a mirror and divide with the aid of an electronic calculator--- the exalted requirements for Couch Potato investing--- a single year of recovery did a world of good. For the 50/50 investor looking back, the negative years simply disappeared. Look back three years--- including the abyss of 2002--- and your trailing 3-year return was 2.04 percent or 3.82 percent.

That's not much to get excited about. But it's way better than losing real money.

Extend your view to 10 years and the Great Bubble Burst of 2000-2002 disappears, replaced by annualized returns near 10 percent.  

  
Table 1: The Traditional Couch Potato Portfolio
Traditional Couch Potato. A mixture of Vanguard 500 Index and Vanguard Total Bond Market Index
Time Period 50/50 Portfolio 75/25 Portfolio
1 year 16.24% 22.38%
3 years    2.04 - 0.89
5 years    3.58    1.64
10 years    9.44 10.35
15 years 10.51 11.40
Source: http://www.morningstar.com/ , 12/31/03 data
  
Table 2: The Complete Couch Potato Portfolio
Total Market Couch Potato. A mixture of Vanguard Total Stock Market Index and Vanguard Total Bond Market Index.
Time Period 50/50 75/25
1 year 17.70 24.55
3 years    3.82    1.83
5 years    4.76    3.42
10 years    9.47 10.45
Source: http://www.morningstar.com/ , 12/31/03 data
  

Why is that 10 percent return important?

Simple. While many investors thought any return below 20 percent was pathetic during the bubble, today's investors are dis-believers in the other direction. They can't believe that you can get a 10 percent return anywhere for any period of time.

In fact, 10 percent is what the Ibbotson Associates figures show. Invest in large-capitalization common stocks for the long term and your annual return will be a bit over 10 percent. Invest in small-capitalization stocks for the long term and your annual return will be a bit over 12 percent. The hard part is that it's a bumpy ride.

Enter simple diversification.

Gains in bonds work to offset some of the losses in stocks. They smooth your investment ride better than your dad's Oldsmobile. At the close of 1999 the trailing returns for the 50/50 Couch Potato ranged from 10.16 percent (for 1999) to a high of 18.06 percent (for the trailing 5 years). While the one-year figure was normal, the 5-year figure was extraordinary.

Unsustainable.

The extraordinary return wasn't sustained. The trailing 5-year return on the Couch Potato sank to only 3.58 percent by the end of 2003. In shorter periods it was even possible to have a loss. At the end of 2002, the Couch Potato Portfolio had lost money at an annual rate of 2.58 percent for three years. That's disappointing and painful---but lots better than losing 90 percent of your money in telecom stocks.

Take a longer perspective and things improve dramatically. At its very worst   (2002) the 50/50 Couch Potato portfolio's trailing 10-year return was "only" 8.81 percent. By the end of last year it was 9.44 percent. (You can see the figures for the full period in table 3.)

  
Table 3: The Longer Your Perspective, The Smaller the Pain
These figures show the annualized compound rate of return for the traditional 50/50 Couch Potato portfolio, an equal mixture of Vanguard 500 Index fund and Vanguard Total Bond Market Index fund, over different time periods.
Time Period Ending December 31 2003 2002 2001 2000 1999
1 year 16.24 -6.95 -1.80    1.17 10.16
3 years    2.04 -2.58    2.89    9.99 16.60
5 years    3.58   3.99    9.66 15.36 18.06
10 years    9.44   8.81 10.37 14.14 12.94
Source: Morningstar Mutual Fund database, author index
  

Let me put some historical perspective on that. When Roger Ibbotson and Rex Sinquefield started to publish their long-term investment returns research more than 40 years ago, the data showed that large common stock returns averaged around 9 percent, a figure that was much publicized by Merrill Lynch. From 1926 through 1967 the annualized return on large stocks was 8.8 percent.   The return rose to 8.9 percent in 1968 as the New York Times declared we had entered an era of "People's Capitalism.

Couch Potato investors have been getting equity-level returns with a smoother ride and less risk. Not bad for people who sleep a lot.

On the Web:

Read the Couch Potato History

Read about Couch Potato Investing

Read the Couch Potato Report Archive

The 2002 Couch Potato Portfolio Report

The 2001 Couch Potato Portfolio Report

The 2000 Couch Potato Portfolio Report

The 1999 Couch Potato Portfolio Report