It’s getting a little embarrassing.
Whatever the test, it seems that a very simple approach to investing will allow anyone with a pulse to enjoy an investment return as good as, or better than, the average equity mutual fund with less risk and trauma.
In earlier columns, for instance, we’ve shown that a 50/50 mixture of stocks and intermediate bonds would provide a return almost identical to the return on the Standard and Poor’s 500 index. If you simply buy an index fund such as Vanguards Index 500 fund, the Fidelity Market Index fund, or the Schwab 1000 fund, and combine it with a broad bond fund such as the Vanguard Bond Market fund or their Intermediate Treasury fund, you have the ingredients for a winning investment.
How simple?
Once a year, divide the total value of the two funds by two and move enough money from the larger to the smaller so they each have equal amounts.
Then ignore them for a year.
So far, we’ve found that the Couch Potato Portfolio was about equal to the return on all stocks from 1973 to the end of 1991, a period that included a bear market for stocks and a major bull market.
We’ve also found that while the Couch Potato Portfolio trailed pure stocks in the 1982-1991 bull market— one of the best in 75 years— it still did well enough to beat more than half of all equity mutual funds.
But what about bear markets?
The Couch Potato wins.
To test this, we used Dimension Funds Advisors software and data to test the performance of the Couch Potato portfolio from January, 1973 to December, 1991 against the performance of the Standard and Poor’s Index. For those who don’t recall, this was one of the most dismal periods for stock investing since the Great Depression. It began with the crash of the so-called “Nifty Fifty” ( a group of large growth companies such as Sears, Xerox, and Polaroid, beloved by institutional investors) and ended with the high interest rates that followed the second OPEC price shock. By the end of 1981, stocks were selling at Price/Earnings and Price/Book Value levels that had not been seen since the 1930’s.
Here are the figures, year by year, for the performance of stocks vs the Couch Potato Portfolio:
| Year | 500 Index | Couch Potato |
| 73 | -14.7percent | – 5.7 percent |
| 74 | -26.5 | -10.3 |
| 75 | 37.2 | 23.4 |
| 76 | 23.8 | 18.1 |
| 77 | – 7.2 | -1.9 |
| 78 | 6.6 | 4.3 |
| 79 | 18.4 | 12.2 |
| 80 | 32.4 | 19.4 |
| 81 | – 4.9 | 2.8 |
Source: Dimension Fund Advisors,Inc.
As you can see, the Couch Potato portfolio is not perfect. You can still lose money.
But the losses are much smaller… and less frequent… and the ups and downs are about half as bad. If you invested in stocks during the period, your annualized compound rate of return for the nine year period was 5.2 percent… but the standard deviation was 22.1 percent. In other words, while the long term return was 5.2 percent, there was a two-thirds chance, in any year, that your return would be 5.2 percent plus or minus 22.1 percent— quite a swing.
The Couch Potato portfolio not only offered a higher return, 6.3 percent, it was only half as volatile with a standard deviation of 11.9 percent.
Here’s how the Couch Potato portfolio compares to an all stock portfolio, sliced three ways (the standard deviation is in parenthesis):
| Period | 500 Index | Couch Potato |
| Long Cycle (73-91) | 11.5 (17.9) | 10.9 (10.7) |
| Bull Years (82-91) | 17.6 (12.1) | 15.2% ( 8.0) |
| Bear Years (73-81) | 5.2 (22.1) | 6.3 (11.9) |
Which brings a major question.
According to the conventional wisdom, long term investors should buy stocks and hold through thick and thin, trusting that stock returns will be superior. If you have followed the conventional wisdom starting in 1973, however, your cumulative return would not have exceeded the return on Treasury bills until the 1980’s and your return would not have bettered the more stable Couch Potato until 1988.
And now we are in 1992, with stocks selling at Price/Earnings ratios and Price/Book Value ratios HIGHER than the ratios that preceded the 73-81 bear market. The historic record suggests that returns from this level are likely to be weak, perhaps even negative.
Bottom line: if you are one of those exceptions who has been an all stock investor, history says this is a very good time to rethink your strategy.
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 Francisco Cornellana Castells: https://www.pexels.com/photo/two-brown-bears-on-grass-field-1062063/
(c) A.M. Universal 1992