uExpress.com: Scott Burns by Scott Burns -- (01/11/2004) HOW TO UNDERSTAND COUCH POTATO INVESTING

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01/11/2004

HOW TO UNDERSTAND COUCH POTATO INVESTING

Many readers misunderstand the Couch Potato Portfolio, my low-cost and simple approach to investing. Every year brings letters and e-mails from readers asking exactly which fund should be used and exactly what percent of their money should be invested in it. Like nervous cooks, the letters make it sound as though something terrible will happen if the formula isn't followed with utmost precision. The world will end; the souffle will fall.

That's not what Couch Potato investing is all about.

Thankfully, a new book makes it all clear: "The Lazy Person's Guide to Investing." It will help everyone understand how to be a Couch Potato Investor (and why), whether their portfolio consists of only two funds or nearly a dozen.

If learning how to be a better investor was one of your New Year's resolutions, this book is core knowledge. It's also a very easy read. Written by "CBS Marketwatch" columnist Paul B. Farrell and published by Warner Business Books, the $19.95 paperback (303 pages) starts with Mr. Farrell's survey asking readers to vote on which portfolio should win the "Laziest Portfolio Oscar."

The Couch Potato Portfolio won.

Does that mean it is the best and only way to invest?

No, but it's a very good start. What Mr. Farrell shows is that you can be a low-cost, low-turnover, index investor with anywhere from two to nearly a dozen funds in your portfolio. He also says you can do it with the growing legion of Exchange Traded Index Funds.

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What's the difference between two funds and many?

Execution.

The two-fund portfolio is easy to implement. Anyone can do it. The more funds you use, the more complicated tracking and managing your portfolio will be. The other portfolios will have more diversification (and possibly less risk), but they will also require more work because they involve percentages.

Let's face it: Talking about percentages remains one of the fastest ways to empty a room anywhere in America.

So if you've been thinking about Couch Potato investing, read this book. You can start with the original Couch Potato Portfolio and then, as the spirit moves you, expand your portfolio to a broader array of asset classes. Doing so is likely to do two good things: reduce your risk and increase your long-term return.

If you are one of the few who will stay in the room while percentages are discussed, you can try, for instance, the seven-fund Coffeehouse Investor portfolio. This portfolio is 40 percent Vanguard Total Bond Index (ticker: VBMFX), 10 percent Vanguard Index 500 (VFINX), 10 percent Vanguard Large Cap Value (VIVAX), 10 percent Vanguard Small Cap (NAESX), 10 percent Vanguard Small Cap Value (VISVX), 10 percent Vanguard International (VGTSX) and 10 percent Vanguard REIT Index (VGSIX).

You can also learn about William Bernstein's nine-fund Coward's Portfolio. Another 100 percent Vanguard portfolio, this one consists of 40 percent Short-Term Corporate Bond Index (VFSTX), 15 percent Total Stock Market Index (VTSMX), 10 percent Small Cap Value (VISVX), 10 percent Value Index (VIVAX), 5 percent European Stock Index (VEURX), 5 percent Pacific Stock Index (VPACX), 5 percent REIT Index (VGSIX), 5 percent Small Cap Index (NAESX) and 5 percent Emerging Markets Index (VEIEX).

The common denominator is low cost and diversification. Wall Street is willing to sell us diversification because it also allows them to increase their commissions and fees.

What Wall Street won't sell us is low costs.

One of the really nice tidbits -- among many -- in this book is Farrell's mention of Paul Merriman's "Explode Loads" page on his www.fundadvice.com Web site. The Explode Loads page takes the 100 largest load funds and directs you to their corresponding no-load equivalents. Farrell, who isn't afraid to do research, tested the four no-load funds offered as alternatives to 27 of the hundred largest load funds. He found that all four beat all 27 load funds.

The bottom line: If you're looking for a good set of do-it-yourself investing tools, you'll find them all in this book.

ON THE WEB:

The Coffeehouse Investor Portfolio:

www.coffeehouseinvestor.com/Returns.htm

Column: Sunday, Dec. 3, 2000: "The Couch Potato Portfolio, Plus"

www.dallasnews.com/business/scottburns/columns/archives/2000/001203SU.htm

The Journal of the Efficient Frontier:

www.efficientfrontier.com/

Merriman's Explode Loads:

www.fundadvice.com/explode.html

CORRECTION:

The accumulation figures in my Sunday, Jan. 4 column, "Summer Your Way to Wealth," were incorrect. Here are the corrected figures. These figures are lower than indicated in the column, but the basic principle is correct: Four summers of work today can grow to $1 million of retirement assets.

Assume a $2,000 annual investment for four years.

Investment Period ... 10.7 percent (Large Cap Stocks) .. 12.5 percent (Small Cap Stocks)

At end of four years ... $9,378.04 ... $9,628.91

Plus:

10 years to age 30 ... $25,917.21 ... $31,268.16

20 years to age 40 ... $71,624.98 ... $101,537.76

30 years to age 50 ... $197,943.25 ... $329,725.70

40 years to age 60 ... $547,037.27 ... $1,070,725.20

47 years to age 67 ... $1,114,423.50 ... $2,442,000.10

(Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; or by fax: (214) 977-8776; or by e-mail: scott@scottburns.com. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.)