Invest Like A Couch Potato – Scott Burns (1)

SOURCE: Larimore, The Bogleheads’ Guide to the Three-Fund Portfolio (Wiley, 2018), 61. Fund Count 1 Year 5 Years 10 Years 25 Years 1 Active Fund 5 Active Funds 10 Active Funds This study assumed an average index fund annual cost of 0.23 percent – higher than current index fund costs – and 2.0 percent for the managed funds. While the failure rate will change as the difference in expenses changes, the reality is that managed funds are burdened with a wide variety of costs that the broadest index funds simply don’t have.

Regular evidence of this shows up every six months in the semiannual SPIVA reports comparing active fund returns, category by category, to their benchmark index. By now you’re wondering what’s in this three-fund portfolio. In his book Larimore cites three mutual funds: Vanguard Total Stock Market Index Fund (VTSMX) Vanguard Total Bond Market Index Fund (VBMFX) Vanguard Total International Stock Index Fund (VGTSX) Today, you can use Vanguard’s slightly lower cost and more tax-efficient exchange-traded funds: Vanguard Total Stock Market ETF (VTI) Vanguard Total Bond Market ETF (BND) Vanguard Total International Stock ETF (VXUS) Yes, those are the exact three ingredients of the Margarita portfolio you saw in Chapter 13.

Taylor Larimore, however, doesn’t specify a precise allocation of the funds in his book. So let’s measure it at the equal allocation of the basic Couch Potato portfolio and see how it compares. Table 14.3 shows what the data tells us when we compare portfolio performance over different time periods using www.portfoliovisualizer. It shows the standard deviation and Modigliani-Modigliani (M2) figures for each portfolio. (Remember that M2 compares portfolios by asking how much the return would be if you added enough riskless cash to equalize their risk).

Note that the basic 50/50 Couch Potato portfolio provided less risk and, as a result, the highest risk-adjusted performance. As you can see, the three-fund Margarita portfolio provided a higher return than the Couch Potato portfolio over the trailing three- and five-year periods. But it trailed over the last 10 years and for the longest possible measuring period, 1/87–3/25. It also had more risk. That resulted in a lower risk-adjusted return as measured by the Modigliani-Modigliani index, M2.

Table 14.3 Comparing Three Asset Class Portfolios. SOURCE: www.portfoliovisualizer.com Portfolio 3 Years 5 Years 10 Years 1/87–3/25 Std. Dev. M2 60/40 5.2% 10.39% 7.67% 8.70% 12.97 12.31 Couch Potato 4.45 8.54 6.64 8.16 11.86 12.65 Margarita 4.49 9.31 6.15 7.53 12.96 10.20 NOTE: Bold numbers have the highest risk-adjusted return based on the M2 figure. They also have a materially lower standard deviation.

Book Information

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• ISBN: 9781394366866, 9781394366880, 9781394366873
• Pages: 230
• Language: English (en)

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