If you were a basic Couch Potato investor at the beginning of the year, your year is looking rather fine. If you weren’t, it’s time to get serious about investment simplicity.
Skeptics should consider some figures.
If you had $100,000 in a basic Couch Potato portfolio on Jan. 1, you had $107,182 at the market close on Sept. 4. Over the same period, a $100,000 investment in the Standard & Poor’s 500 Index would have closed at $107,381. (I learned this on the Portfolio Visualizer website.)
That’s a tiny difference for the anxious ride we’ve had in this year of COVID-19. It’s a tiny difference when you consider that the all-stock S&P portfolio is twice as risky as the 50/50 Couch Potato portfolio. At its worst, the Couch Potato portfolio declined by 10.18%. That was about half of the 19.63% decline of the S&P 500.
If you had taken an even simpler route, $100,000 in the Vanguard Balanced Index mutual fund would have grown to $107,636. You would have done better than the all-stock portfolio with far less risk.
You create a Couch Potato portfolio by putting half your money in a fund that invests in the total U.S. stock market. Then you put the other half in a fund that invests in the total U.S. bond market. These days you can do this without paying any commissions. Better still, the annual costs of the exchange-traded funds that do this are now less than 0.05% a year.
Dirt cheap. Dirt simple.
And if you are arithmetically challenged, yes, you are allowed to use an electronic calculator for the heavy lifting part, which is dividing by the number 2.
You don’t need a Ph.D in finance. You don’t need an MBA. You don’t need to study for the Certified Financial Analyst exam. You can be plain, old, wonderful (but incorrigibly lazy) you.
But wait, there’s more!
Right now, stockbrokers are talking about this being “a market of stocks.” They yell on TV shows about the incredible danger of being in an index fund. Money managers are talking about diversification and the unsung potential of investing in obscure countries.
What they definitely are not talking about is their miserable performance.
Here’s what they won’t tell you. The Vanguard 500 Index did better than 74% of its managed competitors. It also beat the competition by a huge margin. With its return of 7.45%, it beat the average for the category by a stunning 3.67 percentage points.
This is not unusual. Indeed, it was the “worst” performance relative to longer periods. Over the last year, 3-year, 5-year, 10-year and 15-year periods, the fund scored in the top 22%, 18%, 10%, 10% and 15% of surviving funds, respectively.
Morningstar shows similar figures for the Vanguard Balanced Index fund, Investor Shares. It was in the top 13%, beating 87% of its managed competition — just as it has for much longer periods.
If you started this year as a Couch Potato investor, now is the time to claim your bragging rights. You’d be doing others a service. The millions of people who haven’t seen the wisdom of passive investing need to know. They need to hear what they will not be hearing from the usual noisy sources.
No, you won’t hear a word about this from the Usual Sources.
Think of it as The Silence of the Wolves.
Read more about Couch Potato investing
Scott Burns: “Three cheers for sloth and simplicity”
Scott Burns: “Couch Potato Portfolio stands test of time”
Check out Scott Burns’ recent series about public pension funds
Part 1: The Teachers Retirement pension fund has an army of investment managers. How is that working out for teachers?
Part 2: Who will cover the shortfalls?
Part 3: How underfunded are Texas plans?
Part 4: How many Texas public pension funds beat a simple index fund?