Book Excerpt: The Lazy Person’s Guide to Investing

The Lazy Person’s Guide to Investing: In this straightforward and easy-to-follow guide, nationally known columnist and stock market commentator Dr. Paul Farrell shows you exactly how to build wealth with your personal portfolio or 401(k)-even if you hate numbers and finance. Read an excerpt here.

The Lazy Person’s Guide to Investing:
A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing with Their Money
by Paul B. Farrell, J.D., Ph.D.
ISBN: 0446531685
Hardcover
WARNER BOOKS

Think like an amateur.
If you invest like an institution, you’re doomed to perform like one, which in most cases isn’t very well. If you’re a surfer, a truck driver, a high school dropout, or an eccentric retiree, then you’ve got an edge already.
-Peter Lynch, One Up on Wall Street

One

The Couch Potato Portfolio Is Microwavable

Scientific Evidence That Sloth
Always Beats Greed

SCOTT BURNS IS A SYNDICATED FINANCIAL COLUMNIST WITH THE Dallas Morning News. His lighthearted, impish sense of humor makes him a big favorite among Texans, not to mention a growing audience throughout the country.

And it’s easy to understand why he’s so popular once you read any of Scott’s columns or visit his Web site. His casual, keep-it-simple style takes the edge off the all-too-often serious world of finance, making readers smile and come back for more.

Scott launched the Couch Potato Portfolio back in 1991. You can track the glacial no-news-is-good-news progress of the portfolio on Burns’s Web site, where he updates its performance once a year in feature columns that are as eagerly anticipated as Warren Buffett’s annual barbecue in Omaha.

A BIG WINNER IN THE PRETRIAL RUN, BEFORE TAKING OFF

Before Scott introduced his portfolio in 1991, he back-checked the data from 1973 through 1991.

How did it perform? Absolutely super, with an incredible 10.29 percent average annual return for that eighteen-year period. Incredible because, as you recall, those numbers carry through the 1982 bear market and the crash of ’87. Hot stuff, I’d say. Moreover, as Scott puts it, the Couch Potato Portfolio achieved these results with:

• No complicated accounts.
• No diligent reading of the financial press.
• No phone calls from brokers with “opportunities.”
• No meetings with investment advisers demonstrating their constant supervision of accounts.
• Very simple tax returns.

So the Couch Potato is the perfect candidate for laziest portfolio. The Couch Potato Portfolio is so simple it’s an embarrassment to Wall Street’s army of brokers, analysts, and money managers who labor so long and so hard to build their supersophisticated portfolios of handpicked stocks that generate commissions for them.

THE BIG SECRET TO CREATING A COUCH POTATO PORTFOLIO

Here’s the keep-it-simple trick to building your own Couch Potato Portfolio: You need only two funds in a 50-50 asset allocation. That mix will give you all the diversification you’ll ever need for your natural life, through bear markets and bull markets. This is it:

1. (50%) Vanguard 500 Index (VFINX). The Vanguard 500 Index is a $75 billion no-load fund that tracks the Standard & Poor 500. The S&P 500 includes America’s five hundred largest companies. The market capitalization of the index includes roughly 80 percent of all American companies. And the fund’s expense ratio is only 0.18, substantially less than the average 1.30 expense ratio for large-cap funds.

2. (50%) Vanguard Total Bond Market Index Fund (VBMFX). This $15 billion bond fund matches the performance of the Lehman Brothers Aggregate Bond Index and has an expense ratio of just 0.22. Both the stock and the bond funds require a minimum investment of $3,000. So you need at least $6,000 to start your own Couch Potato Portfolio.

That’s all? Yes, that’s it. You heard me: All you need to do here is take $6,000, for example, and put $3,000 in the stock fund and the other $3,000 in the bond fund. Then grab the remote, lie down on the couch, enjoy your favorite programs, and forget about your portfolio till next year, when you’ll need to do about ten minutes of rebalancing (that’s right, just ten minutes a year!).

PERFECT GIFT FOR THE INVESTOR WHO HAS EVERYTHING

There’s more: For the aggressive couch-bound investor who invariably believes you can always add some bells and whistles and improve on virtually anything, Scott also offers the “Sophisticated Couch Potato Portfolio.”

How “sophisticated”? This much: Instead of a 50-50 split between stocks and bonds, the allocation is 75-25. But not to complicate things any more than necessary, you get to use the same two funds.

Put 75 percent of your money in the Vanguard 500 Index and 25 percent of the portfolio in the Vanguard Total Bond Index Fund. That means if you have $10,000 cash to start, you put $7,500 in the stock fund and $2,500 in the bond fund.

YES, IT REALLY IS THAT SIMPLE-AND THAT GOOD

You think it’s too simple? Too good to be true? That there’s gotta be a gimmick? Sorry folks, no tricks. It is that simple. Because it works. Here’s how. In his 2001 annual update Scott reports:

1. Short-term performance. “The Traditional 50/50 Couch Potato lost only 1.80 percent compared to the 11.32 percent loss suffered by the average domestic equity fund.” In other words, the Couch Potato Portfolio beat the stock market by about 10 percent during the very bearish 2001.

2. Ten-year pretrial run. Remember, Scott back-checked performance for the ten-year period prior to the fund’s launch in 1991. Again, very credible results, with a 14.18 percent average annual return. And get this: That outperforms more than 60 percent of all funds with ten-year records. Superior performance with less risk, less volatility, and no tinkering.

3. Recent performance. Scott also points out that “over the last fifteen years the 50-50 Couch Potato provided an annualized compound return of 10.96%. The 75-25 Sophisticated Couch Potato provided a compound return of 12.30%.” Meanwhile, the average balanced fund returned only 9.45 percent, and domestic equity funds returned 11.85 percent.

Once again, folks, dazzling proof positive that pure unadul-terated laziness wins in both the short run and the long run.

REBALANCE JUST ONCE A YEAR …TAKES TEN MINUTES!

Okay, I know I said no tinkering. So I told a little white lie. But just a little one. Scott says you gotta get up off the couch and away from the tube for maybe ten minutes a year. Here’s how the impish genius puts it:

Try this: Once a year-like when you add new money- you take the total value of your investment and divide by two. That tells you how much you need in stocks. And in bonds. So you move some money, as necessary, from stocks to bonds. Or vice versa.

Actually, you may even be able to work it out so you tinker with only one fund. Simply add new money to the fund that’s now underallocated-just enough to bring both back in line with the recommended 50-50 or 75-25 model asset allocations. Keep it real simple!

YES, YOU CAN MAKE A GOOD THING. . . MUCH BETTER

Scott then adds this amusing tidbit: “With telephone exchange privileges at most mutual fund families, you can do this in less time than it takes to go to the refrigerator. Indeed, as a timing exercise, I suggest you put a medium sized potato in your microwave: Your annual portfolio management will be done in less than the ten minutes it takes to cook the potato.” Then back to the tube.

Before you forget it, make a note to check out Scott’s Web site, especially his columns on Couch Potato Portfolios. He does have some interesting suggestions on possible refinements, including situations when a tax-free bond fund makes sense, exchange-traded funds, and how to eliminate all bond fees by buying Treasury securities direct rather than in a fund.

But as Scott tells us, none of those refinements is required in order to retire a millionaire. You don’t need to complicate your life-just stick to the basic Couch Potato Portfolio with no stress, except your little ten-minute annual rebalancing efforts.

WALL STREET HYPE MACHINE-WHERE SILENCE IS GOLDEN

The Couch Potato Portfolio is definitely not going to win any applause from Wall Street’s commissioned brokers, nor from America’s day traders, nor even from fee-based professional financial advisers.

Yes, they’ll put down this oversimplified no-stress portfolio strategy. But secretly, they all know it’s virtually impossible for them to beat the Couch Potato Portfolio. Since none of them can make any money recommending no-load index funds, however, they’ll stay noticeably silent, because they know in their hearts that indexing is the best and safest solution for most Americans.

ACCEPTANCE SPEECH-SLOTH BEATS GREED!

When I informed Scott that his Couch Potato Portfolios were getting the most votes in the laziest portfolio contest, Scott offered this brief acceptance speech: “Let’s hope sloth becomes a universal virtue for investors.”

If you want more of Scott’s straight shooting and light-hearted insights into the Byzantine world of personal finance and investing, have the Dallas Morning News delivered to your doorstep along with your local paper. Well, at least your online doorstep, by linking to Scott’s “It’s Only Money” column and his rather extensive archive at DallasNews.com.

Instead of focusing almost exclusively on our finances, we should be thinking about the things that truly make a difference in our later years: our health, spiritual life, relationships with family and friends, and having a plate full of interesting things to do.
-Ralph Warner, Get a Life: You Don’t Need a Million to Retire Well

Copyright © 2004 by Paul B. Farrell