Heads up! This article is not about the couch nor potatoes. That said, I welcome you to another interesting episode of our portfolio review series. Today, I will be taking us through another lazy portfolio with an unusual name – the Couch Potato Portfolio by Scott Burns.
As you may have guessed from the name, this is a lazy portfolio specially designed for investors who want to do the barest minimum asides from setting up their portfolio. We will talk about the portfolio at length – its creator, investment principles, pros and cons, performance over the years, and most importantly, how you can set it up on your own.
So, fasten your seat belts because I am about to step on the gas!
Key Takeaways
Here are the major points from the article;
- Scott Burns created the Couch Potato Portfolio in 1991 to make investing super simple for everyone, especially newbie investors.
- It is a simple 50/50 stocks/bond allocation, where the bonds are expected to serve as the ‘shock absorber’ during stock crashes.
- This dead-simple portfolio requires investors to invest 50% in a common stock fund and another 50% in a bond fund.
- Despite its basic approach and execution, this portfolio has performed impressively over the past years, coming close to the S&P 500 in some instances.
- Investors can recreate the Scott Burns Couch Potato Portfolio through a 100% ETF asset allocation.
- It is perfect for investors who are close to retirement, have low-risk appetites, or have little or no time to monitor the market.
Couch Potato Portfolio: Overview
Scott Burns, a renowned author and personal finance columnist for the Dallas Morning News, is the creator of Couch Potato investing. This investment strategy gave rise to the Couch Potato portfolio. It all started with Scott Burns’s 1991 column, where he recommended that people “take out the total value of their investment and divide by 2” to know how much they need to put into stocks and bonds.
He added, “I suggest you put a medium-sized potato in your microwave: your annual portfolio management will be done in less the 10 minutes to cook the potato.” Burns’s reference to the potato explains that setting up and managing the portfolio will take less time per year than it would take to cook the potato in a microwave.
The investment strategy behind the portfolio is simple: indexing. Burns adopted indexing to expose investors to highly diversified index funds to minimize volatility while keeping the portfolio very simple. The portfolio comprises two types of assets – stocks and bonds – both represented by exchange-traded funds (ETFs).
Burns argue that having a 50/50 allocation for stocks and bonds ensures that the bonds keep the portfolio afloat when the stock market crashes. The arrangement is similar to what we have in the traditional 60/40 portfolio, but the Couch Potato portfolio is more conservative. Overall, the three main pillars of this portfolio are low-fee indexing, diversification, and simplicity.
Let’s take a closer look at the asset allocation.
Couch Potato Portfolio: Asset Allocation
The portfolio is a basic 50/50 mix of bonds and stocks. Therefore there are only two assets in the mix, and they are both investment-grade funds.
Stocks
Burns’s recommendation here is simple. Investors should put 50% of their portfolio worth into a common stock fund. An example of a common stock fund is the Standard & Poor’s 500 Index (S&P 500). However, investors can opt for other stock funds if they find them more suitable than the S&P 500. For example, some versions of Couch Potato Portfolio replaced the S&P 500 with a total US stock market fund.
Since the S&P 500 comprises about 500 stocks – all large caps, such replacements expose the stock section of the portfolio to some small- and mid-cap stocks, which are better performers than the large-cap stocks.
Bonds
In the traditional Couch Potato portfolio, the 50% bond allocation usually goes to an intermediate bond fund tracking the Bloomberg US Aggregate Bond Index. The index comprises investment-grade government and corporate bonds. However, investors may choose other bond funds they find more suitable than this recommendation.
For example, we have seen versions of the Couch Potato portfolio where the corporate bond fund has been replaced by treasury bonds and the total bond market funds. The former is the more popular replacement because they protect investors from liquidity risk, credit risk, and local taxes. They also do a better job of reducing volatility than corporate bond funds.
Couch Potato Portfolio: Historical Returns and Volatility
If you are curious about how well the Couch Potato portfolio has performed over time, I have answers in this section.
Portfolio Performamce
A capital of $10,000 invested in this portfolio in January 2010 would be worth $27,283 now. This translates to about 172.83% within a period of 12 years. If the same amount of money was invested in the S&P 500 index, which is a popular investment benchmark, the returns would be $36,701 or 262.63%. So, while the S&P 500 is the better performer here, the Couch Potato is not too far behind and, in fact, performs decently for a lazy portfolio.
Portfolio Returns
The annualized return of the Couch Portfolio over the last decade is 8.19%. If we switch to a five-year time frame, the annualized return is 8.29%. The S&P 500, which is our benchmark, had higher annualized returns – 12.40% in the last ten years and 10.99% in the last five.
Portfolio Dividends
Between 2010 and now, the dividend yield of this portfolio has ranged from 1.31% (the lowest, recorded in 2015) to 2.82% (the highest, recorded in 2021). Overall, investors can expect decent dividend yields that may accumulate even more in the long run.
Risk and Volatility
The drawdown of a portfolio is a metric to measure its risk levels. In the case of the Couch Potato portfolio, its worst drawdown was recorded in March 2020, 19.76%. Interestingly, it bounced back three months later(in June) after 56 trading sessions. When it comes to volatility, the five-year volatility of this portfolio is 13.29%. This is much lower than the volatility of our benchmark, the S&P 500, within the same period – 24.35%. The low volatility of this portfolio explains why the benchmark had better returns. After all, no risk, no reward.
If you want more on the historical performance of this portfolio, you should check out this comparison by the people at Recipe Investing.
Couch Potato Portfolio: Pros and Cons
To help you decide if the Couch Potato Portfolio by Scott Burns is right for your investment goals, I have outlined its pros and cons in this section.
Pros of the Couch Potato Portfolio
In one of the previous sections, I stated that the three main pillars of this portfolio are low-fee indexing, diversification, and simplicity. Therefore, these three might as well be taken as the primary benefits of the portfolio.
- The portfolio is very easy to manage. The Couch Potato strategy lives up to its name in every sense – it is a hands-off approach that works excellently for both new and busy investors. It takes a few minutes to set up, and there is no need for frequent rebalancing.
- The portfolio is relatively safe. The two halves allocation this portfolio adopts, where one half goes into fixed-income securities of the U.S. government, makes it a safe move. Moreover, a quick side-by-side comparison of this portfolio with the S&P 500 shows that its drawdowns during unusual market situations have been minimal.
- It offers decent returns. You are investing 50% of your capital into treasury securities with this portfolio. But this does not translate to poor performance in terms of returns. Interestingly, there is little to separate this portfolio and the S&P 500 in terms of average returns in the long run.
Cons of the Couch Potato Portfolio
Here are the downsides of this portfolio:
- Unusual asset allocation. This portfolio’s allocation strategy makes it unsuitable for most investors, especially younger investors with a higher risk appetite.
- Returns could be better. The conservative approach deprives investors of exposure to possible gains in the long run. Even at its best, the chances of this portfolio outperforming the S&P 500 are very slim.
Setting Up Customized Couch Potato Portfolios Using ETFs
This is the exciting DIY section of the article. As always, I will be showing you how you can curate and set up your own Couch Potato Portfolio in line with the investment strategy provided by Scott Burns.
50% Stocks
Vanguard Total Stock Market ETF (VTI)
This fund seeks to track the returns of the Center for Research in Security Prices (CRSP) US Total Market Index. It comprises large-, mid-, and small-cap equity companies spread across different growth and value styles. More imporantly, it adopts a passively managed, index-sampling strategy. It is also cheap, with a 0.03% expense ratio. The exposure this fund offers into the equities market is expected to generate the majority of the gains expected from this portfolio.
50% Bonds
GOVT is a fund that seeks to track the returns of the entire U.S. Treasury Bond market. It effectively exposes the portfolio to U.S. Treasuries with maturity periods ranging from 1-30 years. With this, investors can access the broad U.S. Treasury market via a single fund. In addition to being low cost, this fund adds the much-needed stability to your Couch Potato portfolio and some level of income. So, even when the stock market is experiencing difficult times, this fund will keep the ship steady.
Other Possible Combinations
One beauty of this portfolio is that you can choose other exchange-traded funds instead of the recommendations above, provided they meet the criteria outlined by Scott Burns. Here are a other possible combinations you may want to consider;
For Growth Investors interested in higher diversification and lower cost;
- Bond Market Fund – iShares U.S. Treasury Bond ETF (GOVT)
- Stock Market Fund – Vanguard Grow Index Fund ETF (VUG)
For Income Investors, looking for more income instead of value or growth;
- Bond Market Fund – iShares U.S. Treasury Bond ETF (GOVT)
- Stock Market Fund – Vanguard High Dividend Yield Index Fund ETF (VYM)
For Value Investors who prioritize value investing opportunities;
- Bond Market Fund – iShares U.S. Treasury Bond ETF (GOVT)
- Stock Market Fund – Vanguard Value Index Fund ETF (VTV)
For investors who want international exposure;
- Bond Market Fund – iShares U.S. Treasury Bond ETF (GOVT)
- Stock Market Fund – Vanguard Total World Stock Index Fund ETF (VT)
Depending on your risk appetite, moderate-risk investors could use a stock fund comprising small-cap stocks, like the Vanguard Small-Cap Index Fund ETF (VB) instead of the recommendations above. In addition, for high-risk investors who want to go all out, they can replace the bond market fund with a real estate investment trust (REIT) fund.
Conclusion
Like the real ‘couch potatoes’ spend most of their time on the couch watching their favorite TV series, this portfolio gives you all the time you need to handle other aspects of your everyday life while your investment runs smoothly. It offers investors a decent exposure to the market while keeping it very safe. There is no need to research individual stocks or stay up to date with the market, just choose the two right funds and you are good to go.
However, this convenience and hands-off approach come at a price. For starters, you are limited in terms of how much you can earn with this portfolio. It is heavily allocated to treasury securities which are known to be some of the most conservative investement vehicles out there. Therefore, you will most likely not see this portfolio beating the market. Except your risk appetite is very limited, you may want to consider other portfolios.
I will like to conclude by stating unequivocally that none of the information in this article may be taken as a financial advice. They are for educational purposes only. I recommend you consult your financial advisor if you need guidance regarding your investment moves and decisions.
If you enjoy this article, you can check out similar portfolio reviews on our website.
Good luck!