The couch-potato portfolio is an indexing investment strategy that requires only yearly monitoring by an investor. An investor can implement this strategy by putting half of his or her money into a common stock fund that tracks the Standard & Poor's 500 Index (S&P 500) and the other half into a fund that mimics the Lehman U.S. Aggregate Bond Index for intermediate maturity bonds. At the beginning of each new year, the investor only needs to divide the total portfolio value by two and then rebalance the portfolio by putting half of the funds into the S&P 500 and the other half into the Bond Index.
Let's take a look at how the couch-potato model would have performed in relation to the S&P 500 and Bond Index (based on placing 50% of funds into the S&P 500 and 50% into the Bond Index and rebalancing at the beginning of each year).
Historical Returns Study (1997- 2007)
Bond investments are designed to be much more conservative than stocks. The couch-potato portfolio is designed to utilize 50% of the S&P 500 and 50% of the Bond Index to reduce the volatility of a portfolio at low cost and minimal effort to the investor. In rising stock market conditions, the S&P 500 will typically outperform bond investments, but with greater returns comes increased exposure to risk. During one of the worst bear market periods in U.S. history, from 2000-2002, the S&P 500 lost 43.1% overall, whereas, the couch-potato portfolio lost only 6.3% during the same period. Based on the 11-year study above, an investor would have given up 1.62% in additional annual return (average 9.61 minus 7.99) by using the couch-potato model.
Investors can benefit considerably by implementing a more sophisticated indexing strategy using multiple asset classes and by adding small and international stocks to boost returns. Some investors still prefer active management strategies even though studies have shown that 80% of managers do not beat the comparable index. The couch-potato strategy works for investors who want low cost and little maintenance in a portfolio that contains only U.S. stocks and bonds. Such investors sleep well at night knowing their risk is reduced by not having 100% of funds tied up in the stock market.
This question was answered by Steven Merkel.
Find out which mutual funds include only bonds in their portfolios. Learn why some funds invest in different types of bonds ... Read Answer >>
Learn how you can invest in the corporate bond market without investing a large amount of capital through bond funds and ... Read Answer >>
InvestingFind out how this approach reduces risk and costs so you can maximize your portfolio's return.
InvestingRead detailed information about index mutual funds with some of the lowest expense ratios in their categories, and learn about their pros and cons.
InvestingThese funds can provide stable returns for those who depend on their investment income.
Managing WealthLearn about the world's largest fund, the Vanguard Total Bond Market Index Fund, including its performance and portfolio highlights.
InvestingLearn about how overall portfolio risk can be reduced by adding a variety of different types of bond ETFs to a primarily stock portfolio.
Managing WealthThese historically tested methods will improve your investment results.
InvestingUnderstand how long-term bond mutual funds can benefit an investor's portfolio, and learn the best long-term bond mutual funds for 2016.
InvestingFind out what bonds can do for your investment portfolio.
InvestingLearn about bond mutual funds that investors may want to consider for 2016. Understand why the risk of rising interest rates is a concern heading into 2016.
InvestingHigh-yield corporate bond funds provide an interesting investment option, particularly for private investors chasing returns and a broad diversification.
A mutual fund or exchange-traded fund that seeks to replicate ...
An index used by bond funds as a benchmark to measure their relative ...
A portfolio management strategy and model for investing in fixed ...
For a single bond, it is a measure of maturity that takes into ...
The amount of return an investor will realize on a bond. Several ...
The person or persons responsible for investing a mutual, exchange-traded ...