COUCH POTATO INVESTING – THE LAZY WAY TO WEALTH

It might sound funny but the couch potato investing is similar to a football fun laying on the sofa watching a match and during the ninety minutes game, the only time he perks up is when the home team scores.

It isn’t an exciting way to invest your money. In fact, it’s lazy and boring one.

However, the couch potato investing strategy deliver excellent results over an extended period of time (10-20 years). Better than any financial advisor or fund manager.

Are you tired of the poor performance of your actively managed mutual fund?

If so, this strategy is an alternative to paying a manager whose performance is beaten by the averages.

According to MorningStar, actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons, and experienced higher mortality rates (i.e. many are merged or closed).

“This is shocking!”

Over 3 years period of time, a shocking 60% of managed funds don’t beat their respective index. Over 5 years, the number increase to 80%.

Did you know a managed fund cost between 2-3% more than investing a passive index? And yet the results are underwhelming.

WHAT IS THE COUCH POTATO STRATEGY?

The Couch Potato Strategy — also called index investing, or passive investing — is growing in popularity as more people become disillusioned with overpriced, actively managed mutual funds and stock-picking strategies that try, usually in vain, to beat the market.

The inventor of the couch potato strategy is Scott Burns, then a financial writer for the Dallas Morning News, suggested to invest 50% in an index fund which tracks bonds and the another half in stock’s index.

Every year, he added, you should rebalance the portfolio to 50% stocks and 50% bonds. So simple, that any person can divide a number by 2, can get the benefit of investing with a Couch Potato Portfolio.

You only need to spend one hour per year in rebalancing your portfolio and add some of your saving to the portfolio, yet bringing home an 8% yearly return.

“Did I get your attention?”

If so, carry on reading.

OUTPERFORMING THE SMARTEST WALL STREET GURUS

I’ve been advocating for many years has, yet again, shown a material advantage over the ever-so-hard work of the geniuses constantly thinking of your welfare on Wall Street.

It is happening so regularly over the last years that investors are moving out an increasing amount of money from managed fund to simple ETF investments which have proved to outperform most of the managed investment and at a fraction of the cost.

So, why to pay more for less?

You shouldn’t.

You will be surprised and glad to hear that the cheapest ETFs has only a 0.07% yearly management fee compare to active funds with the administration fees as high as 7% per year.

If you never heard about ETFs from your financial planner is because they can’t pocket any decent fee from you. ETFs are like flyers in the caviar for financial advisers.

If you get on with a couch potato investing system, you don’t need to have a financial planner; it is easy to do by yourself and cost is super low.

Over 20 years of time, you will save thousands of dollars in fees and with an above average return than most active funds.

I’ll not be surprised seeing you drive a Porsche during your retirement days while your neighbor will watch his financial planner drive a Maserati.

So, why the smart Wall Street wolfs under-perform?

Despite long hours interviewing management, their armies of research analysts and stocks, mutual fund managers fail to beat the stock market in the long run.

Don’t take my word for it, there are countless articles on the net with evidence about poor mutual fund managers performance and statistically, nine out of ten active funds underperform the benchmark.

It sounds like a joke, but it isn’t, instead of feeling ashamed about their performance, fund managers earn 6 figures salaries plus bonus at the expense of investors.

Research by C. Thomas Howard, Ph.D., who serves as CEO, has found out three main reasons why active mutual fund underperform;

1. As the fund grows in value, the fund manager invests behind his best ideal stocks, resulting in diluting the portfolio. These decisions are made primarily to grow and to satisfy distribution requirements. There is also an incentive to do so at the expense of performance.
2. 70% of funds tend to match the index in order to avoid the short-term underperformance that is more emotional for investors. They are pressure to reduce errors and don’t take risky bets, limiting the fund manager actions.
3. When the market correct, fund managers are forced to sell the best stocks in the portfolio to give liquidity back to the investors leaving the fund. This affect considerably the performance of active funds over the long term.

MODEL PORTFOLIO FOR COUCH POTATO INVESTORS

I havPORTFOLIOou some general info about the couch potato strategy, let me give you some example of the portfolio so you can get started.

Before lay down the model, I want you consider not only the cost but also the complexity and geographical location.

Your age and risk tolerance are important in the selection of the mix between bonds and stocks. A rule of thumbs suggests a bond allocation that’s equivalent to your age.

For example, if you’re a 30 years old, you might have 30% bond allocation of your total portfolio and the rest in stock. Not all the bonds will do, I advise an index of short-term bonds over those with longer terms.

Reason being, if you are stuck with a long term bond and the inflation is on the rise, your interest return will erode with time.

Usually, short term bonds, get replaced every three years with an update interest rate above inflation.

Keep in mind to rebalance the portfolio once a year, this is critical.

WHERE DO YOU PLAN TO RETIRE?

I mention the geographical aspect of your portfolio because is important to select the stock and bond base on your future retirement location.

If you’re new here, my name is Rudy and I love to travel. Actually, I’m an expat for the last 15 years, having traveled to 30+ countries and lived/worked in 4. I get the importance to plan ahead for the golden years, and you should too.

Even if you haven’t traveled yet, that doesn’t mean in your retirement years that you are going to live abroad.

U.S Couch Potato Portfolio

Age 30 years old

30% short-term U.S government bonds
Schwab Short-Term U.S Treasury ETF

40% U.S Stock
SPDR S&P 500 ETF (SPY)

30% International Stock
Vanguard Total International Stock ETF

This is a sample portfolio for a 30 years old investor looking to retire in USA. The three funds average cost is only 0.10% per year.

As always, younger investors or those with a higher risk tolerance may choose a lower bond allocation. Older investors, or those who are risk averse, may prefer a higher allocation to bonds.

EUROPE Couch Potato Portfolio

Age 40 years old

40% short-term global government bonds
iShares Global AAA-AA Government Bond UCITS ETF

30% Europe Stock
Vanguard FTSE Developed Europe UCITS ETF (EUR)

30% International Stock
Vanguard Total International Stock ETF

You might have notice that I opted for a global government bond instead of Europe’s bond.

The reason is Europe is at a negative rate at the moment so there isn’t anything good to borrow money to European governments and expect lost of return in the future.

European bonds are a bit like using your credit card at the moment, they don’t make financial sense.

THAILAND Couch Potato Portfolio

Age 50 years old

50% short-term global government bonds
iShares Global AAA-AA Government Bond UCITS ETF

10% Thai Stock
iShares MSCI Thailand Capped ETF

40% International Stock
Schwab International Index Fund

Many people dream to retired in Asia in some tropical country like Thailand. Usually, expatriate move there in their fifties to take advantage of easy visa regulations, low cost of life and tropical weather.

I recommend to keep a small portion of Thai stock or any other emerging market because they aren’t stable and in the long run they under-perform developed countries.

The reason is because these market aren’t strictly regulated and companies are run by local families with in mind their own interest instead of minority share holder.

CANADIAN Couch Potato Portfolio

Dan Bortolotti has done a great job to educate Canadians about Couch Potato Investing with three Canadian model portfolio with different risk profiles.

CONCLUSION

Couch potato investing is an excellent option for investors looking to spend the least time possible on investing but getting ahead financially.

The three sample portfolio above are to give you a practical idea how to make your own base on your age, retirement location, risks and keep in mind the low cost.

You can just do a search on Goggle for more ETFs, you will notice the performance are similar but the costs can be vary. Always opt for the cheaper one because in the long run, the cost saving will build up and compound.

I have created an Expatriate Portfolio Strategy to get you started to build your wealth and by the second year you’ll find useful my tips in rebalancing your portfolio.

HAPPY INVESTING!

As always, leave a comment if you have a question! And if you’re already using the couch potato strategy, I’d love to hear your experience. 🙂

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