Couch Potato Investing 2019
We have a work ethic problem. Too much of it.
Lots of people think that if they work hard and long, if they grunt and puff, if they demonstrate serious mental effort, if they read copiously and take notes – if they do all those things — they will be successful investors.
Not so.
It may be a good idea in other areas of life. But investing is one place where less is definitely more.
Comatose on a beach
Yes, I know. It’s difficult for those burdened with a work ethic to accept this. Think about it. You could have been comatose on a beach in Mexico for the entire year, doing nothing but straining your liver, and your investments would have made 19.75 percent for the period.
Such are the rewards of Couch Potato investing.
In case you missed the memo – probably because you were trying to be serious about your investing – anyone can do this. You don’t even have to go to Mexico.
The only requirement is that you can still fog a mirror and that you can divide by the number 2 with, or without, the aid of a hand-held calculator.
Here’s how. You use the calculator to divide your investment money into two equal amounts. Then you put one part in a low-cost index fund that mimics the performance of the entire U.S. stock market. After that you put the remaining part in a low-cost index fund that tracks the entire U.S. bond market.
Wait a year or so. Repeat.
Easy and dirt-cheap today
There was a time, not that long ago, when there was only one place to do this. But today, dirt-cheap, big index mutual funds and exchange-traded funds are available at virtually every investment outlet. Indeed, commissions have disappeared. You can even get one of these funds with an annual expense of zero.
How can that be?
That’s what the big dogs in financial services must do to get some of the money that would otherwise have gone to funds that cost maybe 0.05 percent a year, or less, to run.
Basically, it’s now possible to invest at virtually no cost.
Here’s an example. According to Fidelity Investments, workers 50 to 59 years old had average 401(k) and IRA balances of $174,000 and $123,700, respectively, early in 2019. That would translate to annual investment costs no more than $87 for the entire year on those accounts.
Yes, you can pay more.
You can, of course, pay more. Opportunities to pay more are abundant. New opportunities to pay more are created regularly. Indeed, the Texas Legislature was so concerned about the well-being of sales people in financial services last year that they removed the 2.75 percent a year maximum fee limit for 403(b) products offered to teachers. Now the sales folks can earn more for themselves on teachers’ savings.
To be sure, 2019 was an exceptional year. But the basic Couch Potato Portfolio earned at an annualized rate of 9.42 percent over the last three years and at 7.22 percent annualized over the last five years. It earned those returns with only half the money exposed to the stock market.
Many years of Required Minimum Distributions
While a figure like 7.22 percent may not be exciting for most people, it has a powerful meaning for those approaching, or in, retirement. That 7.22 percent annualized five-year return is slightly larger than the required minimum distribution for an eightysix-year-old. In other words, Couch Potato retirement accounts were growing, every year of the last five, by as much as people in their mid-80s are required to withdraw in a year.
And guess what? About half of all Americans will have, um, outgrown their need for required distributions by that age.
A dirt simple, dirt-cheap retirement investment, in other words, will likely keep you going as long as you’re going.
Couch Potato Portfolio Vending Machines |
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| This table lists the major retail discount brokers and retirement account firms and their particular ETFs or mutual funds used to build a Couch Potato portfolio. Exchange-traded funds (ETFs) from iShares and State Street are available through any retail brokerage account, usually commission free. | ||
| Source | Funds | Expense ratio, Ticker |
| Vanguard | Vanguard Total Market Index ETF | 0.03% VTI |
| Vanguard Total Bond Market ETF | 0.035% BND | |
| Schwab | Schwab U.S. Broad Market ETF | 0.03% SCHB |
| Schwab U.S. Aggregate Bond ETF | 0.04% SCHZ | |
| Fidelity | Fidelity ZERO Total Market Index Fund | 0.00% FZROX |
| Fidelity U.S. Bonds Index Fund | 0.025% FXNAX | |
| All Brokerage Firms | ||
| iShares | iShares Core S&P Total U.S. Stock Market ETF | 0.03% ITOT |
| iShares Core U.S. Aggregate Bond ETF | 0.05% AGG | |
| State Street | SPDR Portfolio Total Stock Market ETF | 0.03% SPTM |
| SPDR Portfolio Aggregate Bond ETF | 0.04% SPAB | |
| Source: firm websites, links above | ||
Related columns:
Scott Burns, “The Simplicity Manifesto,” 3/31/2019 https://scottburns.com/the-simplicity-manifesto/
Scott Burns, “How to build the basic Couch Potato Portfolio anywhere, for next to nothing,” 9/12/2018
https://scottburns.com/how-to-build-the-basic-couch-potato-portfolio-anywhere-for-next-to-nothing/
Scott Burns, “Dirt Simple Wins Again: Couch Potato Portfolio 2018,” 1/4/2019 https://scottburns.com/the-simplicity-manifesto/
Scott Burns, “The High cost of Low Returns and Yields,” 7/24/2015 https://scottburns.com/the-high-cost-of-low-returns-and-yields/
Scott Burns, “The Longevity of the Couch Potato Portfolio,”2/9/2019 https://scottburns.com/the-longevity-of-the-couch-potato-portfolio/
Scott Burns, “Making Texas Safe for Investment Predators,” 10/27/2019 https://scottburns.com/making-texas-safe-for-investment-predators/
Sources and References:
Adrian D. Garcia, “Here’s the average 401(k) balance by age and how to raise yours,”5/15/2019 https://www.bankrate.com/retirement/average-401k-balance-by-age/
Portfolio Visualizer website: https://www.portfoliovisualizer.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 Chris McClave from Pexels
(c) Scott Burns, 2020
2 thoughts on “Let’s Hear It for Sloth and Simplicity!”
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Dear Scott,
My husband & I are so very pleased to see your column return to the Dallas Morning News. I realize now that the newspaper does not print all of them, so we are doubly pleased to find more of them online. We especially enjoy the updates on the Dripping Springs projects.
We are long time followers of your couch potato investing strategy. I notice that in this column, you recommend the non-stock half of the portfolio be invested in a total U.S. bond fund. If I recall correctly, when you created the couch potato portfolio, you recommended a total U.S. bond fund, but at some point (perhaps 15-20 years ago?), you began recommending inflation protected securities (such as VIPSX) rather than the total U.S. bond fund. Do you now feel that the total U.S. bond fund is a better option than the inflation protected securities fund?
Thank you again and keep up the good work!
Thanks your very kind note. And sorry for the delay in answering. I’m still trying to master Word Press.
Back when I launched the Couch Potato idea TIPS were selling at an attractive real return over the inflation rate. This happened, I think, because the volume of TIPS was still relatively small compared to the enormous market in U.S. Treasury obligations. But over time, investors bid away that attractive real return and TIPS turned out to be more volatile than conventional Treasury obligations and Treasury obligations dominate the total bond market.
It’s important to remember that I introduced the Couch Potato investing notion in 1991. That was two years before the introduction of the first ETF and long before the proliferation of exchange traded funds. ETFs have not only revolutionized how we invest, they have also changed how markets functioned because they have made capital more mobile. We won’t know for some years, but my personal expectation is that many “factors” for investing such as value stocks and small cap stocks will have had any advantage eliminated by this increased mobility of capital.