The Longevity of the Couch Potato Portfolio

            Talk about return on investment and people go all glassy-eyed. Some leave the room. That doesn’t happen when you talk about living a long time and not running out of money. You’ve struck an existential chord – no one wants to run out of money.

            That includes Couch Potato investors.

            So I’m not going to measure return on investment here. Instead, we’re going to look at how two basic Couch Potato portfolios have worked for retirees – in dollars.

How much is that in dollars?

            We’re assuming they started with $100,000 and an initial 4 percent withdrawal rate. The dollar amount was then inflation-adjusted each year. We’re looking at time periods from 30 years to the last three years.

            One portfolio is the dirt-simple basic Couch Potato portfolio. It is one-half domestic total stock market and one-half domestic total bond market. The other is the Margarita portfolio. Created in honor of The-Buffett-Named-Jimmy, it is three equal parts domestic stocks, international stocks and domestic total bond market.

Simple Succeeds

            The results are encouraging. And surprising. As you can see below, the basic Couch Potato portfolio survived the last 30 years rather well. It quintupled in value.

            The surprise is that it served retirees better in every time period, often by a wide margin, than the Margarita portfolio. (See the results in the table below.)

    Sequence of returns risk

             How you made out depends a lot on what happened in your first years of retirement. Financial planning types call that “sequence of returns risk,” noting that a bum start is, well, a bum start. A good start, on the other hand, can help you weather later market disasters.

            If you started 30 years ago, you had the benefit of the bull market of the ‘90s. Even though the value of your portfolio declined in three of the first 10 years, the rush of the late ‘90s carried you through three consecutive years of the dotcom crash as the new century began.

            Indeed, if you retired 30 years ago, you’ve kept up with inflation. And you still have a lot more assets — $535,163 — than when you began. You’ve got it made.

Death becomes more likely than portfolio failure

            How can I say that? Simple. If you were a couple and retired at age 65, there’s only a 1 percent chance that both of you are still alive after 30 years. There is a 16 percent chance that one of you is still alive. But 84 out of 100 couples no longer need spending money. That’s according to a life probability calculator made available by financial planner Michael Kitces.

            Things are different if you retired 20 years ago. That started your retirement with those three consecutive years of decline. Then you got hit by the financial crisis of 2008. At the end of 20 years your nest egg is only slightly larger than what you started with. The only solace is perverse – at age 85 there’s only a 19 percent chance both of you are still alive. There’s a 31 percent chance both of you are dead.

            Either way, if you measure success by not running out of money, Couch Potato investing is looking pretty good.

 Do the numbers tell us anything else?

            Yes: Diversification hasn’t been useful over the last 30 years. While we’d expect the Margarita portfolio to be a bit more volatile because it has 66 percent in equities rather than the 60 percent in the Couch Potato, the reality is that it’s a lot more volatile. Declines are more damaging.

            The Couch Potato portfolio fell 15.33 percent during the dotcom crash. But the Margarita dropped 25.33 percent. That’s a lot more damage.

            Similarly, the Couch Potato portfolio fell 25.15 percent during the subprime crisis, but the Margarita portfolio fell 36.48 percent. Indeed, in every period of decline, the diversified Margarita portfolio did worse than the basic Couch Potato.

            What does it mean?

            Thirty years is a long time. I’m beginning to wonder if broad diversification is a lot less useful than the financial gurus tell us.

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Table 1

Table 2

Related columns:

Scott Burns, “Dirt simple wins again: Couch Potato Portfolio 2018,” 1/4/19

https://scottburns.com/dirt-simple-wins-again-couch-potato-portfolio-2018/

Scott Burns, “Living (Well) with the Basic Couch Potato,” 7/15/18

https://scottburns.com/living-well-with-the-basic-couch-potato/

Scott Burns, “Margarita Portfolio,” 7/29/2018

https://scottburns.com/margarita-portfolio/

Couch Potato Investing category: https://scottburns.com/category/couch-potato-investing/

Couch Potato Investing category on the scottburns.com archive:

https://scottburns.com/category/couch-potato-investing/

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.

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(c) Scott Burns, 2019