Understanding the couch potato portfolio
Some people love to sit down and watch the television and disregard exercise. We generally call these people couch potatoes. Did you know that there are also investments relative to couch potatoes? They are called as such because they are kind of similar.
Are you the kind of investor who prefers long-term? Are you not that interested in watching and reacting to the stock market often? Yes? So, you are the type to leave your funds alone. There is an investment strategy called "couch potato portfolio" that only needs minimal monitoring. When we say minimal monitoring, it is very passive that you only need to check it once every year.
How did it start?
In 1991, a personal finance writer named Scott Burns found a way so that people will not need fund managers to handle their investments anymore. He developed the couch potato strategy where the portfolios are not complex and slow to set up. They also require less maintenance and cost.
How does it work?
The main gist of this strategy is splitting a person's holding equally between stocks and bonds. When we say stocks, we talk about equities and bonds as debt. Appreciation happens because bonds are more conservative than stocks. Everything happens with volatility reduction and at a minimal fee and supervision. For example, the investor can put half of the money they plan to invest in common stock and the other half to intermediate bonds.
Now, here comes the minimal monitoring part. The investor only needs to the total value of the portfolio every year by two. Then, the portfolio gets rebalanced by placing half of the money in common stock and the other half into bonds. This will be done every New Year.
Tell me more about the couch potatoes.
Many studies show that most money managers do not meet their goal indexes. In fact, 80% of them do not. It is the reason why the couch potato portfolio was developed. It prefers the passive approach any day to the active one. We mentioned that it is only for investors who prefer low-cost and low-maintenance assets in their portfolios. It should only have US stocks, bonds, and a little bit of international stocks for better returns. An investor can incorporate a more sophisticated strategy and use different asset classes like that. In a nutshell, this strategy's main idea is a two asset and two investment portfolio.
Everyone has different preferences.
This strategy can be
done to portfolios easily and quickly. As soon as it is done, you can easily
forget it. These portfolios decrease less than the market in decline periods.
However, they increase less even when the markets are up. Others think it's not
much of a strategy since you just revisit it once a year, but some people might
love the idea. It is possible to be a part of the stock market's growth without
exerting too much effort. Investors involved in this
strategy know that they have less risk because not all of their money is poured
into equities.
