Yes, reporting on 2017 isn’t what you’d call timely news. Last year has been over for six months. Surely Burns could have raised himself out of his retirement hammock earlier than this, right?
No, actually that’s wrong.
The essence of Couch Potato investing, the method I’ve been advocating since 1991, is that you embrace inactivity as your path to success in investing. Don’t follow the markets. Forget about the talking heads on television. Turn away from the experts who claim to know the future if you just contribute generously to their purchase of a $50 million estate in the Hamptons. Instead, buy low cost index funds; awaken from your sloth once a year (if necessary), make an adjustment or two.
That’s it. Done. Add money if you’re saving for retirement. Subtract money if you’re retired and need cash to refill your fridge, restock your bar or replace lost golf balls.
In 2017 the most basic Couch Potato portfolio returned a comfortable 12.07 percent. You could do this by having an investment account almost anywhere, using the calculator app on your smart phone to divide your savings by the number “2”, and putting half your money in the Vanguard Total Market Index exchange traded fund (ticker: VTI). After that, put the remaining half in the iShares Treasury Inflation Protected Securities Bond exchange traded fund (ticker: TIP). Then ignore.
How does that measure up against what’s usually called a “balanced portfolio”— one that’s 60 percent equities and 40 percent bonds? Rather nicely. The average fund in the category returned 13.21 percent in 2017, trailing the Vanguard Balanced Index fund’s 13.75 percent. Those funds, however, had more risk because they are typically 60 percent equities, not 50 percent. If the basic Couch Potato had been 60 percent VTI its return would have been 13.9 percent.
Was there a simple way to get a higher return?
There was last year. If you had gone the extra mile of effort and built the “Margarita portfolio”, your return for the year would have been a very nice 16.71 percent. And all you had to do was add a third exchange-traded fund, Vanguard FTSE Developed Markets Index Fund (ticker: VEA) and divide your money in three even parts instead of two. You can prepare for this by making several rounds of Texas’s favorite drink using the traditional 1/3, 1/3, 1/3 recipe.
Just remember: practice makes perfect.
Which will be better in the long run? It depends. Generally, the Margarita portfolio should do better than the basic Couch Potato because it has 67 percent equities instead of 50 percent. But in bear market years, that won’t be true. Also, there will be years when international investments do better than domestic stocks. And years when they trail domestic stocks. So, as J.P. Morgan famously said when asked what the stock market would do, “It will fluctuate.”
Will investing this way give you a stunning performance?
No, that’s not the point. What it will do is get you out of the manager and market guessing business. That, in turn, will help you do better than the vast majority of professional managers— with essentially no effort and minimal expense. In fact, being a Couch Potato investor is easier, cheaper and more tax efficient than it has ever been. To use a technical term: it’s dirt-cheap.
How cheap is dirt-cheap? For the basic Couch Potato, try 0.12 percent a year plus a $5 commission per trade, if you have to pay one at all. For the Margarita portfolio, try just over 0.10 percent plus a commission if you have to pay one at all.
Want to spend even less? Substitute the Vanguard Total Bond Market Index ETF (ticker: BND, expense ratio 0.05 percent) and your total annual could will be less than 0.05 percent.
Low cost is a large part of the “secret sauce” that makes this kind of investing so beneficial. For those who don’t want to make investing their life (and that should be just about everyone), this is about as good as it gets.
A little history will illuminate just how great the change has been. Back in 1991 only a handful of index mutual funds existed. The first exchange-traded fund wouldn’t exist until 1993. Today, there are a multitude of index funds, over 2,000 exchange traded funds, and expenses have come down, down, down.
This is a great time to be the proverbial “small investor.”
| How the most basic Couch Potato Portfolios did in 2017 | |
| This table shows the returns of two Couch Potato portfolios and their component funds in 2017 | |
| Fund/Portfolio | 2017 Return |
| Vanguard Total Market Index ETF (ticker: VTI, expense ratio 0.04%) | 21.21% |
| iShares Treasury Inflation Protected Securities Bond ETF (ticker: TIP, expense ratio 0.20%) | 2.92% |
| Couch Potato portfolio (1/2 VTI, ½ TIP) | 12.07% |
| Vanguard FTSE Developed Markets Index Fund ETF (ticker: VEA, expense ratio 0.07%) | 26.42% |
| Margarita portfolio (1/3 VTI, 1/3 TIP, 1/3 VEA) | 16.71% |
| Benchmark: Vanguard Balanced Index Fund (VBINX, expense ratio 0.19%)) | 13.75% |
| Benchmark: Category Average | 13.21% |
| Source: Morningstar | |
Scott Burns’ personal finance column was featured in the Dallas Morning News from January 1981 until his retirement last year. This column is his first as editor, publisher, and chief bottle washer for www.couchpotatoinvesting.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.
(c) Scott Burns, 2018