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.
(For more on this topic, read How Portfolio Laziness Pays Off and Five Quick Research Tips for Busy Investors.)
This question was answered by Steven Merkel.
Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
The most important equity market indexes are the S&P 500, Nasdaq Composite and Russell 2000. These indexes in total provide ... Read Full Answer >>
A 12b-1 fee in a mutual fund is meant to cover the fees of companies and individuals through which investors of a fund buy ... Read Full Answer >>
An index fund often uses the market capitalization of component companies as the basis for constructing the index. In contrast, ... Read Full Answer >>
Mutual Funds & ETFsThese three transportation funds attract the majority of sector volume.
Fundamental AnalysisTaxes may be a necessary evil, but that doesn't mean they can't be reduced. Here's a host of smart moves today's investors can make.
Mutual Funds & ETFsLearn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
Investing BasicsWhether you're just starting out or have been investing for years, mistakes happen. But some of them will cost you big and can easily be avoided.
Investing BasicsIndex funds can act as quality diversification tools, but they can also present danger if you don't use them correctly.
Mutual Funds & ETFsInterested in trading ETFs? Here are three ways to avoid unnecessary fees.
Mutual Funds & ETFsLearn about the iShares MSCI India exchange-traded fund, which invests in equities of Indian companies and is suitable for risk-tolerant investors.
Mutual Funds & ETFsFind out about the Guggenheim Russell Top 50 Index ETF, and read about some recommendations regarding the suitability of this investment.
Mutual Funds & ETFsFind out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
Active Trading FundamentalsUnderstand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
A Next Generation Fixed Income (NGFI) manager is a fixed income ...
Next generation fixed income is an innovative approach to investing ...
The maximum rate of index growth that an annuity will be credited ...
An index that uses the performance of a sampling of securities ...
An investment strategy in which securities are chosen based on ...
A supply of capital belonging to numerous investors that is used ...