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Thursday, Mar 28, 2024

Personal Finance–‘Couch Potato Fund’ Didn’t Perform Too Badly in 1999

It’s that time again. Time to overcome sloth and indolence for a few moments and see how our Couch Potato portfolios did in 1999. You will recall that Couch Potato investors are lazy but not rude. We wouldn’t, for instance, challenge professional investors and advisers by using darts to select mutual funds. Too callow. Too energetic. No, we use an electronic calculator and divide our fortune into two equal parts, investing one-half in an index fund such as the Vanguard 500 Index Fund and the other half in a major bond index fund such as Vanguard Total Bond Market Index fund. Then, as Mickey Blue Eyes would say, we “fuhgettaboutit.” We let a year go by, perhaps devoting ourselves to margarita research, and then take out our dusty calculator once more so we can “rebalance” our portfolio back to a 50/50 mixture. For those with racy inclinations and a tolerance for higher math, we have the Complicated Couch Potato portfolio. It uses the same funds but mixes them three parts equity fund to one part fixed-income fund, a 75/25 mixture. This allows us to show off our mastery of fractions at cocktail parties. So how did we do? Pretty well, considering that 1999 was the first year in the last five in which professional money managers actually beat the S & P; 500 Index. And they did it rather impressively, too. The average domestic equity fund provided a return of 27.34 percent, a full 6.30 percent better than the S & P; 500 Index. While the Complicated Couch Potato has actually beaten the average domestic equity fund in five of the last 10 years, both portfolios got creamed this year, returning 15.61 percent (Complicated CP) and 10.16 percent (Simple CP). Actually, that shouldn’t be a surprise. Stocks are supposed to do better than bonds most of the time, so an all-stock portfolio should do better than a mixed portfolio most of the time. Measure the Couch Potato portfolios against their balanced peers, however, and both portfolios beat the average domestic balanced fund in 1999, just as they beat it over the last three-, five- and 10-year periods. In a roaring bull market, the 75/25 Couch Potato portfolio has been able to keep up with the average professionally managed equity mutual fund in all the longer time periods. The 50/50 Couch Potato has been able to beat the average managed balanced fund in all time periods. The biggest surprise last year was Fidelity Puritan. One of the most commonly held balanced funds in 401(k) accounts, this fund actually beat the S & P; 500 Index in 1992, 1993 and 1994, but has been sinking against its balanced-fund peers in recent years, ranking in the 78th percentile in 1999 compared to the 21st percentile over the last 10 years. Income Fund of America has been in the bottom half of all balanced funds over the last five years. The bottom line: Sloth, combined with callow indifference to the markets, continues to be a good formula for investment success. Q & A; I am divorced. My children are 10 and 12. I just received a $100,000 inheritance that is my security-for-life nest egg. Without a tax-sheltered vehicle at present, where do I put this money? I want to accomplish two things. First, I want to protect the money from taxes as much as possible for growth to retirement (I am in the 15 percent tax bracket). Second, I want to protect it from a greedy, financially disastrous ex-husband when it comes to funding my children’s college education. An annuity would put the money in a retirement wrapping, but you pooh-pooh annuities. In addition, if I created a legitimate second job/self-employment business, would I be entitled to create a simplified employee pension (SEP) and funnel more of those dollars into it and be better off than an annuity? C.M., Chicago There are two menaces here, and they may not be as bad as they seem. In most divorce agreements, financial ties between the former spouses are severed, with particular attention to present and future assets. The ties that remain generally deal with child support, child education and, in some cases, alimony. Your former husband has no direct way to get to your inheritance. He can only get to it indirectly by defaulting on promises he has made in the divorce agreement. If he does that, you may need to use some of your assets to fulfill the promises that he breaks while using legal means to force him to fulfill the obligations. If he has shown a long pattern of financial irresponsibility, you should plan accordingly and encourage your children to contribute to their education. The other menace, the tax man, needs some rethinking. In the 15 percent tax bracket, there is little need to use tax shelters and they should play virtually no role in your investment planning. You can minimize your tax bite by using equity index funds such as the Vanguard 500 Index Fund. Such funds generate very little dividend income and rare capital gains distributions. As I have demonstrated in past columns, simple purchase of an index fund would have outperformed all but a handful of tax-deferred annuity sub-accounts. While not all S & P; 500 Index funds are created equal, they are now available from a great many fund companies in addition to Vanguard. A search of the Morningstar database revealed 32 large-capitalization stock funds with neither a front nor deferred load, an expense ratio of less than 0.5 percent, and a minimum purchase of $25,000 or less. Among the major no-load fund companies, Fidelity, Schwab, T. Rowe Price, Scudder and Strong offer them. You can also go a step further in tax deferral by looking for a “tax-managed” index fund. Vanguard Tax Managed Growth and Income, has actually managed to do slightly better than the S & P; 500 Index over the last year, three years and five years. I’m 35 and think I’ll work at least another 25 years. I max out my 401(k) in blue chips, equity income funds and stock index funds. I’ve bought a second home, which I rent out. Is there anything I should do to mitigate the risk of a major market slump due to millions of baby boomers retiring all at once? D.C., by e-mail There isn’t anything you can or should do today, and there may be no need to do anything in a distant tomorrow. I know the “demography is destiny” theory, but I also think that both retirement and investment patterns will change significantly over the next few decades. First, many people will work longer and retire later as they contemplate a life expectancy of 90 or 100 years. Second, even those who retire at traditional ages are likely to strive to continue building their investments in retirement, knowing that their retirement will be a long one. In other words, I don’t think a rush for the exit is inevitable. 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: [email protected].

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