Model Portfolio #1: Couch Potato Portfolio

(This is the first in my series of Model Portfolio Comparisons.)

The Couch Potato Portfolio is the invention of Scott Burns, a personal finance columnist at the Dallas Morning News. Originally, the portfolio consisted of just two funds – the Vanguard S&P 500 Index Fund (VFINX) and the Vanguard Total Bond Index Fund (VTBMX). That was over 15 years ago, and it has beaten most balanced funds in the meantime. The current version is below.

Asset Allocation (All Ages)
50% Total US Stock Market
50% US Inflation-Indexed Securities.

Pie Chart for Couch Potato Portfolio

There are many ways that people find fault with this portfolio – low stock allocation, no risk adjustment with time, no international exposure, no REIT fund. Partially in response to these, Burns has also introduced other variations like the Margarita Portfolio and Four Square Portfolio. The Margarita Portfolio is 33% Total US Stock Market, 33% Total International Stock Market, and 34% Inflation Protected Securities. But still, you can’t beat the simplicity.

Comments

  1. I think sometimes people may be missing the point of Mr. Burns (or perhaps I’m missing it). But a lot of people would be better of with a simple allocation where they can just “walk away” and focus on making more money, leveraging the talents they have that may not be investment-related.

    That’s why I’m so excited about the Target or Lifestyle funds, those seem to have everything you’d want — leaving you to focus on finding a bigger shovel to throw money on your nest egg.

    But there will always be those that have a talent, love, or special interest for the portfolio allocation modeling, analysis, etc. And to them, Mr. Burns’ idea just doesn’t cut it :)

  2. I want to bounce an idea off you…

    Typically advisors recommend a small allocation (5-15%) of your portfolio into a REIT.

    However, if you own your home, you already have real estate in your ‘portfolio’. I understand you don’t have commerical/industrial/hospitality exposure, but is there a strong correlation b/twn the four anyway?

    A home provides you with potential capital gains, while a REIT is potentially an income play, but that would be covered if your large caps are weighted towards dividend paying stocks, as a lot of people advocate.

  3. Actually the Couch Potato Fund was the invention of Mario Gabelli:

    http://www.businessweek.com/1998/06/b3564047.htm

  4. KR – Some advisors like REITs as a form of diversification, as it is not fully correlated with some other asset classes. Bogle, founder of Vanguard, says that you don’t need REITS because if you buy a total stock market fund, you are already getting the REITs in there on a cap-weighted basis.

    Some say if you own real estate, you can cut back on your REIT holdings. Others say your own home doesn’t count as an investment. Honestly, I don’t know what is best and it may be hard to find a true “correct” answer.

    Barndoor – There may be more than one “Couch Potato”, I don’t think the name is trademarked? Your link says Mario started his version in 1994, and it appears that he actually started the Gabelli Global Interactive Couch Potato Fund, now called the Gabelli Global Growth Fund (GICPX). This fund is definitely not the same as described above.

    I’m actually referred to a portfolio, not an actual mutual fund, that online sources say Scott Burns started in 1991.

  5. Scott Burns blog looked pretty informative. But does he not have an RSS feed? All I could find was a feed for comments, but not the articles?

  6. Scott Burns RSS Feed He sure doesn’t make it easy!

  7. Yeah I’d be happy to do a 50/50 portfolio if I didn’t ever have to deal with: limited 401(k) choices, start-up company stock option compensation, real estate, friends needing loans… does that count as micro cap?? I’d definitely be interested in an asset allocation resource that went into more complicated scenarios.

    If I understand to what asset allocation is about, that is spreading out your investments into things that don’t move together, then what’s going to move out of synch with your house? I mean, isn’t appreciation of house prices extremely local (“froth in some markets”)? Perhaps apartment REITs move opposite of housing prices generally, I just don’t know. I think you’d also have to calculate the potential fluctuation of your house price, and somehow that number should guide you for how much you’d have to invest (hedge?) in that “other” asset. I think.

    One more thing. If you’re not going to sell your house and move into a smaller/cheaper one, can you really count it (count “on” it) as an investment?

  8. Having a decent return is nice. But why not do some active investing ourselves. I’m not talking about speculative investments, but just some good solid investing, taking into account a company’s financial statements and relevant ratios (PE, etc).

    A side benefit of taking part in the market could help later in life (or earlier if you switch companies) when you need to roll your investment from a 401K to an IRA… While a high percentage of the money will be invested in fix income, at least a small percentage should be invested in some type of stock or stock fund… And if you have experience with money, hopefully you will have the base knowledge to make wise decisions… practice makes perfect.

    Oh, and to anybody that is reading my comment, this MyMoneyblog is one of the best financial blog on the web! Thanks for doing such a great job day in and day out!!! :)

  9. > Some say if you own real estate, you can cut back on your REIT holdings. Others say your own home doesn?t count as an investment.

    There’s one really important way that your house cannot count as an investment. If you give a careful honest reading to Bernstein’s Intelligent Asset Allocator, you cannot miss the point of rebalancing. In fact, I would characterize that as the single most important discovery of the book.

    I find it a bit ironic that optimal allocation strategy (i.e. what percentage to put in what), although the title-topic of the book, is apparently a hopeless game to get exact. The “perfection points” are shifting and unstable mathematically. Exact allocation is not nearly so important as a practice of regular rebalancing at reasonably long intervals.

    It is much more important to pick a reasonable allocation and rebalance correctly than it is to pick a perfect allocation and rebalance poorly.

    You cannot really rebalance your house with your other investments. On those grounds I would count it outside of your investments. You want the REITs because they are weakly correlated with other asset classes and you can rebalance with them.

  10. If you go to Scott Burns web site you will find that he actually has several off shoots of the couch potato portfolio that add a little spice some have a small percentage in Vanguard Int. fund index and some with a percentage in Vanguard’s Reit index. He has a question/answer column in the Dallas Morning News that is very good and has also written a couple of books.

  11. PS This is the link for the other Couch Potato Portfolios

    http://assetbuilder.com/?p=358

  12. @Barndoor:

    Scott actually did invent the couch potato and it has been around much longer than 1994.

    Thanks for the link to AssetBuilder’s after looking around I noticed that they have a couch potato results that they update every month. You can see Vanguard and Fidelity fund results all the way to his ten speed.

    http://asssetbuilder.com/inv_potato.aspx

    But it also looks like he has started a new venture with DFA, has anyone tried AssetBuilder’s? I read their ADV just wondering if anyone had any comments.

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