What Is Couch Potato Investing And Here’s How To Get Started On It
As people get increasingly disenchanted with underperforming and over-priced mutual funds, there has been a greater interest in the couch potato investing strategy.
The couch potato investing strategy is a tactic to build a diversified, low-maintenance portfolio which is engineered to deliver returns on bonds and stocks markets at minimal cost. It is also commonly known as index or passive investing. Initially conceptualised from a finance writer named Scott Burns in 1991, he developed it as an alternative for his readers who were still dependent on money managers for their investments.
What is couch potato investing strategy? And how does it work?
Burns’ suggestion is to invest 50% in stock index funds (such as S&P 500 index) and 50% in bond index funds (a fund with many different bonds). Subsequently, the investor should rebalance the couch potato investing portfolio by bringing the investible funds in each fund back to a 50/50 split once a year, and leave the portfolio untouched for the rest of the time.
It is a simple strategy that can be employed by anyone looking to invest, with the investor being able to manage their investments by dividing the portfolio value into 50/50.
Out of all investment strategies out there, it is not a very exciting strategy to invest your money. In fact, it is a mundane and predictable investing strategy.
However, this strategy has been proven to deliver excellent results over a long period of time, having better returns than investing with financial advisors or fund managers.
Instead of paying fund managers to beat the market, couch potato investors go for market returns at the lowest cost possible. Furthermore, couch potato investing returns are not gained at the expense of huge investment risks.
Back in 2001, the average domestic equity fund ‘lost 11.32% while the couch potato only lost 1.80%’, according to Investopedia. The low risk incurred, coupled with low costs, high diversification, minimal time spent and proven results makes couch potato investing an attractive investing tactic for the time-strapped investor to adopt.
How can I get started on it?
Given the attractiveness and track record of couch potato investing, you might be wondering, “ I want to create my own couch potato investing portfolio! How do I get started?”
That would depend on how you plan to invest.
Perhaps you want to invest based on the growth potential of different geographical regions. Here are some examples of region-specific investment portfolios.
In this case, it is crucial to watch out for the domestic and political conditions that can heavily influence your investment risks and opportunities.
Couch Potato Investment Portfolio Example 1: Emerging Market Exposure
Perhaps you might be interested in investing in emerging countries like Thailand.
According to Smartmoneytoday, we can see how this plays out.
- 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)
Looking at this portfolio, it is highly recommended that a small portion of the emerging country’s stock is kept, as emerging countries are usually not so stable and under-perform in the long run.
Furthermore, companies in emerging countries are run by local families with their self-interest in mind, coupled with the fact that their markets are loosely regulated. If you are thinking of investing in emerging countries’ stocks and bonds, be aware of the political and domestic conditions that come with it.
On the contrary, the risks of investing are different in developed countries in Europe.
Couch Potato Investment Portfolio Example 2: Developed Market Exposure
- 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)
To get more information on the above funds, you can go to iFAST Global Markets to know more.
From the above example, you will have noticed that the bonds are global instead of Europe’s. One reason why this is so is that developments in Europe in recent years generally don’t seem as bright anymore. With recent instability and developments such as Brexit, terror attacks, and separatist threats, investing in Europe is highly volatile.
Different developed countries have varying risks and conditions. Thus, before investing in one of their stocks and bonds, it is advisable to do your research beforehand and be cautious while investing in these areas.
Deciding on your level of risk tolerance
The investor’s age is a cornerstone when it comes to the selection of the mix between bonds and stocks in couch potato portfolios. This is because different ages will determine different levels of risk tolerance. If you are a younger investor, your risk tolerance tends to be higher as younger investors can afford to take more risk with lesser commitments and a longer investment horizon.
However, as an older investor, they might be more risk-averse and need more security as they age, thus having a lower risk tolerance when they get older.
One rule of thumb in determining the mix between bonds and stocks in couch potato investing portfolios is to have a bond allocation that is equivalent to your age. For instance, if you’re 40 years old, you can have a 40% bond allocation of your total portfolio and the rest in stock.
One reason for employing such a move for bond allocation is that if you are simultaneously stuck with a long-term bond and rising inflation rates, interest rates will begin to erode over time.
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Parting notes about couch potato investing
For the strategic investor looking to invest at the lowest cost and least time possible, couch potato investing is an excellent option that can be considered. When coming up with your own portfolio, do take note of the required factors such as the level of risk you are willing to take and factors such as geographical location and age tolerance.
Also, keep in mind the low cost of investing and ensure that you rebalance your couch potato portfolio at least once per year to see returns on your investments for these are the pre-requisites for couch potato investing to be successful.
That being said, a word of caution when investing in bond index funds given that bond index funds are often mired in enormous amount of government debt according to an article on Kiplinger. Nonetheless, the couch potato investing strategy has been shown to be a largely stable, reliable and profitable tactic in the long run.
To get started, there are platforms out there that you can buy index funds from. Some of them include Ameritrade and Vanguard where you can buy and sell stock and bond index funds and create your own couch potato investing portfolio.