Couch Potato Investing
The couch potato approach to investing is scientifically designed to permit you to invest without worry, without reading the news and without following what is happening to Intel. Lots of really, really brainy people in scientific laboratories around the world have studied this approach designed for people who think technical analysis is figuring out when to replace the battery in the channel clicker.
- What?
- Put 50% of your money in long-term Treasury bonds and 50% of your money in a stock index fund.
- Why?
- Over the last 70 years, US Treasury bonds have yielded about 2 percent a year after inflation with a low variance of returns. Stocks have yielded about 7.1 percent a year after inflation with a higher variance of returns. The 50/50 combination of the two gives you an expected after inflation return of roughly 5 percent and relatively low risk. This easily beats the couch potato's next best friend (CD's which have barely beaten inflation over time). In recent years, the Couch Potato portfolio has performed much better, but always beware that anything can happen in the future. This portfolio is appropriate for many investors who are seeking to minimize risk while maximizing return over a long horizon. It isn't appropriate if you can't afford to lose some money, or if you have special tax considerations. You can certainly vary the portfolio mix as your instincts suggest.
- You will notice that the portfolio suggests indexing as opposed to active management. The reason is that you have to pay for active management (even 1 percent of your money a year can add up to be a lot). This would be worth it if active managers consistently delivered. But over the last 10 years, the average active portfolio manager actually underperformed stock market indices (by the way, following tips from your broker wouldn't be any better). If it is hard to beat an efficient stock market (where few have an informational advantage), then an active manager who reads all the brilliant analyst reports in the world, does lots of his own research and stays in touch with the pulse of the market should do just about as well as you could watching Gilligan's Island on your couch eating meatloaf with a beer, while picking stocks by throwing darts at the stock page of the local paper (or, for that matter, by placing the paper in the bird cage and selecting stocks by where the bird droppings land).
- The couch potato portfolio above is designed for US investors but could easily be adapted for investors with short attention spans in other countries.
- How?
- Sit on your couch and pick up the phone to buy mutual funds with the lowest possible expense ratios and 12b-1 fees which deliver the goods. Vanguard is known for having expense ratios (what they charge you to manage your money) which are the lowest in the US mutual fund industry. You can call them at 1-800-860-8394 or 1-610-669-1000. The Vanguard Long-Term U.S. Treasury Portfolio of Vanguard Fixed Income Securities Fund has a miniscule annual expense ratio of 0.28% and has returned an average of 10.1% a year to investors over the last 10 years (higher than the historical average because interest rates have fallen). You can buy a stock index fund from Vanguard too. For example, the Vanguard Index Trust-500 Portfolio attempts to provide investment results that parallel the performance of the Standard & Poor's 500 Composite Stock Price Index. The expense ratio is 0.20%. The fund has had an annual return average of 14.8% over the last 10 years.
The above is just a suggestion. Not very exciting. Not original either (this idea is attributed to Scott Burns, a financial writer for the Dallas Morning News). Not endorsed by any fund company. It may not be right for you. Please don't sue if you lose a lot of money.
OSU Virtual Finance Library
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