When creating a portfolio for retirement or other investment goals, it’s all about strategy. Investing like a couch potato essentially means taking more of a hands-off approach to your portfolio. If you’re curious about how couch potato investing works, here’s what you need to know.
What Is Couch Potato Investing?
Being a couch potato investor means putting your investments on autopilot using a lazy portfolio strategy. When you build a lazy portfolio, you’re putting together a diversified collection of low-cost index mutual funds or exchange-traded funds. An index fund is a mutual fund or ETF. Those, in themselves, are groupings of stocks, bonds and other investments. Index funds typically track a benchmark or index, with the goal of matching its performance, rather than beating the market.
Couch potato investing is a passive investment strategy. You’re not making changes to your portfolio frequently in reaction to movements in the market. However, that’s what you would with an active investment strategy. Typically, having a couch potato portfolio means you check in once a year and make adjustments as needed.
How Couch Potato Investing Works
Couch potato investing keeps things simple. It comes down to how you divvy up your portfolio.
There are different allocations you can use, based on your investment goals and risk tolerance. But a sample couch potato portfolio might hold 40% domestic stocks, 40% international stocks and 20% bonds. Meanwhile, an 80/20 split between stocks and bonds is simpler.
The goal is to build a portfolio that doesn’t require a lot of hands-on management. Also, you can minimize the number of index funds you invest in. So for example, you might only have two or three funds. One represents the U.S. stock market as a whole. Another represens the international stock market. The last fund focuses on the bond market.
The equity side of your portfolio is what helps to drive growth. The bond side helps balance out stock risk and market volatility. Once a year, you can go in and rebalance your portfolio to keep your target allocations toward either one intact.
Even though you’re limiting yourself to a few index funds, you can maintain diversification by choosing the right funds. For example, a total stock market index fund might offer exposure to every stock in the S&P 500. It’s a simple way to grow a portfolio over time while managing risk.
Passive Investing vs. Active Investing Returns
How well does a couch potato investment portfolio performs over time? Look at how passive funds perform historically against their active fund counterparts. That’ll tell you what to expect.
According to Morningstar, only 24% of active funds managed to outperform their average passive fund rival during the 10-year period ending in December 2018. Active value funds tended to have the lowest success rates, with only 26% of those funds beating out their passive fund peers. So in a nutshell, focusing on passive management for the long-term with a couch potato strategy could yield higher returns overall.
Who Is Couch Potato Investing Right For?
Being a couch potato investor might appeal more to some people than others. Generally, this strategy could be a good fit if you:
- Are investing for the long-term.
- Prefer a passive investment strategy to an active one.
- Are looking for a low-cost way to invest.
- Want to make rebalancing and diversification easier.
A couch potato strategy tends to be more of a long game because you’re banking on the stocks in your index funds increasing in price over time. This kind of strategy wouldn’t appeal to someone who’s interested in being a more active trader and realizing near-term gains.
Another plus of couch potato investing is that it can be a more cost-effective way to invest. There are a number of index mutual funds and ETFs that carry low expense ratios, which means fewer fees taking a bite out of your returns. Not only that but you may pay fewer commissions than you would if you were trading stocks more frequently. And holding onto to investments for the long-term in a taxable brokerage account means that when you eventually sell, you’re subject to the more favorable long-term capital gains tax rate.
How to Set Up a Couch Potato Portfolio
Becoming a couch potato investor can be easier than you think. If you’ve decided this strategy is right for you, there are two basic steps to tackle.
First, decide how you want to split your portfolio between equities and bonds. You might choose a 50/50 split, 60/40 or somewhere in-between. Ultimately, this depends on things like your age and time horizon for investing, risk tolerance and goals.
From there, you can decide how many funds you want to invest in and which ones to buy. Again, you can keep this really simple. Consider choosing just a handful of index funds that track the entire stock market or the total bond market.
Once you’ve got your couch potato portfolio set up with your brokerage, the hard part is done. Going forward, you’ll just have to check with your investments annually to see how your assets are weighted and your funds are performing. You can rebalance if necessary to pull your asset allocation back in line with your chosen targets.
The Bottom Line
Couch potato investing allows you to take a set-it-and-forget-it approach to portfolio building. If you’re looking for a less time-intensive way to invest, it could be worth investigating. Like any other investment strategy, it’s important to weigh performance and cost against your goals before diving in.
- Consider talking to your financial advisor about couch potato investing and its pros and cons. Your advisor can help you decide whether it’s something you should explore and which index funds you might want to invest in. If you don’t have an advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- When comparing index funds, pay attention to how often assets inside the fund turn over. An index ETF, for example, may have less turnover than a traditional index fund, which is a good thing from a tax perspective. When there’s less turnover, there are fewer taxable events. The more tax-efficient your couch potato portfolio is, the more of your returns you get to keep.
Photo credit: ©iStock.com/g-stockstudio, ©iStock.com/Bet_Noire, ©iStock.com/yongyuan
Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. Shes worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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