How To Build the Basic Couch Potato Portfolio Anywhere, For Next To Nothing

I like to cook. I cooked for my younger brothers when I was a kid. I’m the primary cook in the Burns family today. My wife says it’s my love language. And, truth is, I’d rather cook for people than talk.

Don’t get me wrong.  I’m not a foodie.  I don’t spend hours shopping for obscure foods, or over the stove.

It’s just a great source of pleasure.

One reason:  It’s easy for me. Cooking isn’t easy for many. They see recipes as though they were instructions to defuse a deadly bomb. They suffer over a forgotten seasoning or extra pinches of it. They give all of their measuring instruments, down to the quarter teaspoon, full workouts.

A lot of the fun is lost.

For many, perhaps most, it’s even worse for investing.

But here’s the reality. As in cooking, investing doesn’t need to be wildly precise. After 40 years of study and reporting I get suspicious when I hear someone going deep into the weeds.  It’s also possible to make substitutions where something similar is available. Just like cooking.

And just as you can cook as good a meal on a gas, electric or induction stove top, you can make a good portfolio at Vanguard, Schwab, Fidelity, Ameritrade, E-Trade or at most of the other investing platforms. Just don’t talk with anyone on commission.

The important thing is to keep it simple. The longer your portfolio “cooks” undisturbed, the more you’re likely to love the result.

Let’s start with the basic Couch Potato portfolio recipe.

This recipe has only two ingredients: Domestic stocks and domestic bonds, in equal amounts. It’s more suitable for older people than younger people. Why? Simple. The proportion of stocks is relatively low. Years ago it was difficult to find the ingredients.  Today, you can find a confusing array of possible choices.

Those choices can provoke lots of conversation and argument. But the single most important thing is the basic 50/50 mix of stocks and bonds.

The original Couch Potato portfolio, a short history

—Low-cost index funds have existed since the mid-1970s. But there were only a handful. The Vanguard 500 Index fund mirrors the return and risk of the Standard and Poor’s 500 index. This index accounts for about three-quarters of all stock market value. The first exchange-traded fund (ETF) did the same thing, but it wasn’t launched until 1993.

—The broadest domestic bond market fund you can buy is one that duplicates the entire domestic bond market, including mortgage-backed securities and the U.S. Treasury market.

Today you can cook this portfolio just about anywhere, at a cost no greater than 0.05 percent a year.

Cooking the Couch Potato portfolio — on different stoves

Vanguard

The original Couch Potato portfolio was done with two mutual funds that required a minimum investment of $3,000 each. It was one-half Vanguard 500 Index Investor shares (ticker VFINX, expense ratio 0.14 percent, 15-year performance rank in Morningstar’s “large blend” category in top 28 percent of surviving funds. (If you have $10,000 to invest per fund you could start with the Admiral shares of the same fund (ticker VFIAX, expense ratio 0.04 percent, 15-year performance rank in top 23 percent of surviving funds.)

The other half of the portfolio went into Vanguard Total Bond Market Index Fund Investor shares (ticker VBMFX, expense ratio 0.15 percent, 15-year performance rank in category a disappointing 61^stpercentile of surviving funds. (Again, with $10,000 to invest you could invest in the Admiral shares (ticker VBTLX, expense ratio 0.05 percent, 15-year performance in the top 54 percent of surviving funds.)

The importance of surviving

That word “surviving” is important. Many funds don’t make it. So if you were choosing these funds 15 years ago, their actual performance against the original larger number is significantly higher.

But that was then.

Today, it’s easy and cheap. You can buy exchange-traded-fund versions of the original mutual funds with no minimum purchase. At Vanguard you can buy them with no commission and at the same expense ratio as the Admiral shares.  Vanguard S&P 500 ETF, ticker VOO, and Vanguard Total Bond Market ETF, ticker BND (expense ratio 0.05 percent).

Finally, while you were limited to the Vanguard 500 Index fund 25 years ago, today you can invest in the total U.S. stock market. That means you get to participate in the growth of small and mid-cap companies as well as the very largest. The Vanguard Total Stock Market ETF(ticker VTI, expense ratio 0.04 percent, 15-year performance in top 10 percent of surviving funds in the large blend category. Note the performance difference, top 10 percent vs. top 23 percent.

So the modern, lowest cost version would be one half VTI, one-half BND. Invest and rebalance to 50/50 once a year. Then let simmer through retirement.

Fidelity

A latecomer to index funds, Fidelity plunged forward recently with the introduction of its zero-cost funds. You can make a basic Couch Potato portfolio there with the new Fidelity ZERO Total Market Index Fund(ticker FZROX, expense ratio 0.0 percent), no minimum purchase). Unfortunately, to complete the portfolio with a Fidelity fund you would have to invest the remaining money in the Fidelity Total Bond ETF (ticker FBND, expense ratio an expensive 0.36 percent.

But there is good news. Fidelity offers 240 iShares ETFs. They are offered commission-free, so you can buy the iShares Core U.S. Aggregate Bond ETF(ticker AGG, expense ratio 0.05 percent) instead.

If you are one of the millions of workers in a Fido-based 401(k) plan and don’t have these funds as choices on your plan menu, check to see if you can open a brokerage account “window”— it will give you full access to the Fidelity platform.

Schwab

Charles Schwab, along with Vanguard, has been a leading price-cutter. The firm offers “over 250” commission free ETFs. And those ETFs, including the basic ingredients for the Couch Potato portfolio.

The Schwab U.S. Broad Market ETF(ticker SCHB, expense ratio 0.03 percent) tracks the Dow Jones U.S. Broad Market Index and includes the largest 2,500 U.S. stocks.

The Schwab U.S. Aggregate BondETF (ticker SCHZ, expense ratio 0.04 percent) tracks the Bloomberg Barclays U.S. Aggregate Bond Index.

TD Ameritrade

Ameritrade offers some 300 commission-free ETFs, including 137 from iShares or SPDR State Street Advisors. You can duplicate the basic Couch Potato portfolio with SPDR Portfolio Total Stock Market ETF(ticker SPTM, expense ratio 0.03 percent) and SPDR Portfolio Aggregate Bond ETF(ticker SPAB, expense ratio 0.04 percent).

E Trade

E Trade, like Ameritrade, offers a big menu of ETFs from many ETF firms. More important, they offer commission-free ETFs from both Vanguard and iShares. So you’ll be good to go with Vanguard Total Stock Market ETF (ticker VTI.) and Vanguard Total Bond Market ETF (ticker BND).  You could also do it with iShares Core S&P Total U.S. Stock Market ETF  (ticker ITOT, expense ratio 0.03 percent) and iShares Core Total USD Bond Market ETF(ticker IUSB, expense ratio 0.06 percent)

Other platforms

With intense competition between all firms, you can most likely get started, commission-free by checking which ETFs from Vanguard, iShares, or SPDR State Street Advisors are offered.

Stocks

—Vanguard Total Stock Market ETF (ticker VTI, expense ratio 0.04 percent)

—iShares Core S&P Total U.S. Stock Market ETF (ticker ITOT, expense ratio 0.03 percent)

—SPDR Portfolio Total Stock Market ETF (ticker SPTM, expense ratio 0.03 percent)

Bonds

—Vanguard Total Bond Market ETF, ticker BND, expense ratio 0.05 percent)

— iShares Core U.S. Aggregate Bond ETF (ticker AGG, expense ratio 0.05 percent)

— SPDR Portfolio Aggregate Bond ETF (ticker SPAB, expense ratio 0.04 percent)

What’s important here is that expenses are minimal, under 0.05 percent, and the differences between the performances of broad index funds is likely to be small as well.

Related Columns:

See how you would have done over the last 25, 20, 15, 10, 5 and 3 years making withdrawals from the basic couch potato:

Living (Well) with the Basic Couch Potato

See how the Couch Potato portfolio did in 2017:   https://scottburns.com/the-couch-potato-investing-report-2017/

On the web:

Back test your Couch Potato portfolio with www.portfoliovisualizer.com  https://www.portfoliovisualizer.com/backtest-portfolio

The Economics of the Fidelity 401(k) Brokerage Window, Scott Burns, 9/30/2003

The Economics of the Fidelity 401(k) Brokerage Window

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo credit: Pixabay via Pexel

(c) Scott Burns, 2018