Couch Potato Investing

Adjust your investments only once a year if you have the coach potato syndrome!

Couch potato investing is a strategy attributed to Scott Burns, a financial writer for the Dallas Morning News.

It is designed for investors who don't want the worry of reading the financial press or doing all the other things associated with value investing.


Couch Potato Strategy

The basic strategy is to seach for a mutual fund with the lowest possible expense ratio - which really means an index mutual fund, as well as a Treasury portfolio of Fixed Income Securities, and put half your money in each.

The rationale is that the average active fund manager actually underperforms the stock market index over an extended period but charge much higher fees.

Given that US stocks have yielded over 7 per cent after inflation over the last 70 odd years and US Treasury bonds have yielded about 2 per cent a year after inflation with low volatility, the expectation is that you can earn close to an average 5 per cent after inflation with relatively low risk.

The approach would work using similar fund types in other countries and could be tweaked by altering the percentage of stocks to fixed income securities depending on the level of volatility that you are happy to handle.

The combination of higher fees and lower performance allows the couch potato investor to enjoy life with minimum worries with what is happening on the stock market.


In Summary

The features of this approach ...

• No stock broker or financial planner needed
• Plenty of diversification
• No brokerage commission to pay
• Minimum fees
• Adjust your investments only once a year

So is this the best and only way to invest? No - but a couch potato portfolio is a good start and is seen to be appropriate for investors who are wanting to maximise returns over the long term as well as to minimise risk ... with minimal hassle.

Do I use this approach? - No, because it does not in my opinion provide the best value over the long term - which is what value investing is all about.

The stockmarket works in cycles, and being in tune with these cycles means that the value investor is more likely to be buying near the bottom at below intrinsic value and selling near the top at above fair value.

Index fund investing, on the other hand, implies that you will be invested at the top and also at the bottom of market cycles. Gains will only be made because the stock market historically trends upwards over time.

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