The Couch Potato Portfolio

After poring over hundreds of articles, reading dozens of books, and listening to hours upon hours of lectures about investing, one thing becomes clear: it is very, very hard to beat the market over a long period of time. Do you really expect to beat the market repeatedly by buying that "hot" stock? Come on now. Turns out, stocks that are out of favor with people have a better return than the "hot" stock over the course of history. So where does that leave you? How are you supposed to invest intelligently when you aren't poring over financial statements all day long? The answer is called the Couch Potato Portfolio.

The key to this portfolio is diversification and the way you do that is by buying low-cost mutual funds/Exchange Traded Funds (ETFs) (these are made up of many stocks instead of individual stocks) across many different asset classes and from all over the world. You can't just buy the huge companies that we have all heard of, like Apple and Wal-Mart, because there isn't enough growth left in those businesses. Did you know that historically, those small companies that no one has every heard of have produced a better return than those big companies? Well it's true. Check out this chart that shows how much $1 invested across a given asset class in 1926 would have grown in the next 80 years. Small stocks clearly provide a greater return than large stocks historically. And you can't focus solely on American stocks because the United States' economy is already established and is growing at a much slower pace than over 100 countries around the world so it is wise to invest internationally (lucky for us, many prominent American companies do lots of business overseas).

So here is what I suggest for your Couch Potato Portfolio:

                                   Name                                             Percent of Portfolio
                                   S&P 500                                                   13%
                                   U.S. Value                                                20%
                                   U.S. Small Cap                                         12%
                                   U.S. Small Value Cap                                10%
                                   U.S. Midcap                                             10%
                                   Total International                                   25%
                                   Emerging Markets                                     5%
                                   REIT                                                         5%

Just a little background info: The S&P 500 is made up of 500 of the largest American stocks. Pretty much any large company you can think of is a part of this index . Next, a value fund. A value fund is a group of stocks which are deemed undervalued (and have often fallen out of favor with the general public generally). Historically, these unpopular stocks have outperformed popular stocks by several percentage points annually. For the most part, publicly traded companies are small cap, mid cap, or large cap (or small companies, medium size companies, or large companies). Most of the companies we have all heard of are large cap companies. Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. These are countries like China and India, which are growing at a much faster pace than the US. And last is a REIT, or Real Estate Investment Trust. This is a way of investing in real estate without actually owning the property directly.

It is important to note that this just includes the equity (stocks) portion of your portfolio. If you are just coming out of college, there is no reason to put too much money at all in bonds since historically, stocks outperform bonds by a large margin (see chart above). As you grow older, though, this should change to reduce risk.

This portfolio has everything a basic investor needs in an investment portfolio. And quite frankly, this is all any investor needs. Large (safer) companies, smaller (riskier) companies, value, international exposure, and a small dose of real estate. This is a portfolio that won't keep you up at night. It's called a couch potato portfolio because you don't have to worry about it. You could sit on your couch (or bed if you are moh) all year, not make any moves, and be perfectly content. The only thing you would need to do at the end of the year is "rebalance" your money so the percentages match the above percentages again. That's a discussion for another day though. The point is, if you buy into this philosophy, make regular contributions, AND LEAVE YOUR PORTFOLIO ALONE, this method will work, and there is a very high chance you will be financially better off than if you didn't use it.

So your next question may be, how do I go about implementing a plan like this? Well you will have to wait until my next blog to find out.

Take Care.