Dirt Simple Wins Again: Couch Potato Portfolio 2018

The harder you run, the more you fall behind. So relax.

That’s the message, once again, that Mr. Market sent to those who seek to beat him.

—The simplest portfolio did relatively well.

—The most diverse and complicated portfolios got whacked.

Unfortunately, the operative word is “relatively.” Most investors lost money last year. You “won” by losing less. Most of us prefer to win by making more.

If this keeps happening, some very basic ideas may get called in for an overhaul. Or, heaven help the gurus and investment consultants, they could be scrapped altogether.

Another year at the beach wins again

Here’s reality. If you had dragged yourself away from the beach for a few minutes early last year, used your trusty calculator to divide your investment portfolio by the number 2 and put that amount of money into two dirt-cheap index funds, you would have done better than a large majority of investors.

Specifically, a 50/50 mix of Vanguard Total Market Index ETF and the iShares Treasury Inflation Protected Securities Bond ETF would have provided a loss of 3.31 percent. Had you been more traditional and used the Vanguard Total Bond Index ETF instead of the TIPs fund, you would have lost a bit less, 2.66 percent.

As a reference, a one-choice-once investment in the Vanguard Balanced Index fund Admiral shares (ticker: VBIAX, expense ratio 0.07) would have lost 2.86 percent, doing better than a whopping 89 percent of all funds most people call balanced because they are mixes of stocks and bonds. Since the two choices for the most basic Couch Potato portfolio returned losses of 3.31 percent and 2.66 percent, the Couch Potato was keeping good company last year.

As it usually does.

After simplicity, it’s all downhill

If you were even a tad more complicated, your return went downhill. The Margarita portfolio, for instance, lost 7.13 percent. Named in honor of the other Buffett, the one who made Parrotheads a household phrase, it sports equal amounts of three asset classes — domestic stocks, international stocks, and domestic bonds or Treasury inflation protected securities. It was hit hard by the 14.75 percent loss suffered by investment in a broad international stock fund.

Bad tequila, I guess.

Vanguard had the same experience with a new managed fund. While Vanguard Wellington (a 60/40 balanced fund, ticker: VWELX) returned a loss of 3.42 percent, the recently introduced Vanguard Global Wellington fund (ticker: VGWAX) returned a loss of 4.71 percent. It seems travel is more likely flattening than broadening.

In fact, almost any choice you made outside of dirt simple lost money. You got bruised in a different place, but you still got bruised. If you were really well diversified, you got bruised all over.

Thinking about real estate? The Vanguard REIT index fund ( ticker:VNQ) lost 6.02 percent. Energy? The Vanguard energy fund ( ticker: VDE) lost a painful 19.96 percent. Emerging markets? Down 14.75 percent via the Vanguard Emerging Markets index ETF ( ticker : VWO). Value tilt funds? Sorry, no relief there, large or small, domestic or international.

The only asset class that wasn’t a stick in the eye was international bonds. An investment in the Vanguard Total International Bond ETF (ticker: BNDX) returned a positive 2.81 percent, beating 97 percent of its managed competition.

Let’s hear it for low costs and simplicity

If this were a once only, one-year thing, few would scratch their heads. Diversification across different kinds of assets is one of the central ideas of modern investing. It has been a non-functional idea so far this century. That’s a long time.

That same diversification (and the higher management fees associated with it) is one of the reasons pension funds across Texas (and the rest of the country) have produced disappointing results for the last decade.

As I pointed out in three earlier columns, the Teachers Retirement System pension fund, the other statewide retirement funds and local retirement funds all over Texas have trailed the Vanguard Balanced Index fund for five or 10 years running while paying out significant management fees.

Will diversification eventually pay?

In theory, it should. In practice, it’s looking like the only sure thing is the benefit from low fees in index investing.

Related columns:

Scott Burns, “Local Pension Fund Performance: All the Wrong Monkeys,” 11/26/18  https://scottburns.com/local-pension-fund-performance-all-the-wrong-monkeys/

Scott Burns, “Couch Potato Investing versus Texas State Pension Funds,” 10/6/18  https://scottburns.com/couch-potato-investing-versus-texas-state-pension-funds/

Scott Burns, “Can Couch Potato Investing Do Better than the Teachers Retirement System of Texas?,” 9/16/18  https://scottburns.com/can-couch-potato-investing-do-better-than-the-teachers-retirement-system-of-texas/

Scott Burns, “Living (Well”) with the Basic Couch Potato,” 7/17/2018 https://scottburns.com/living-well-with-the-basic-couch-potato/

Scott Burns, “The Couch Potato Investing Report: 2017,”7/1/2018 https://scottburns.com/the-couch-potato-investing-report-2017/

Scott Burns, “Couch Potato Investing” columns category https://scottburns.com/category/couch-potato-investing/

Scott Burns, “Couch Potato Investing” columns on the archival site, scottburns.com https://scottburns.com/category/couch-potato-investing/

Sources and References:

Morningstar www.morningstar.com

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 by Ibrahim Asad from Pexels

(c) Scott Burns, 2019