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Publication: Investor's Notebook
Couch Potato Portfolios

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      Investor's Insight - Monday, January 16, 2006           
          "A Digest of Investment Opinion From the 
             World's Leading Financial Advisers"


Comment The Post Below...

by Scott Burns

As the late Abbie Hoffman once said of Worcester, Mass., 
the year 2005 was "best viewed from the rearview mirror 
of a rapidly moving car."

Not that it was a terrible year. 

We've had worse, and the memories are recent. No, it was 
just a sub-par year. While the long-term return on large 
common stocks has been 10.4 percent, the Standard and Poor's
500 index returned less than half that in 2005. Similarly, 
while the long-term return on intermediate government bonds 
has been 5.4 percent, the U.S. bond market returned less than 
half that in 2005. Basically, 2005 was a bum year for stay-
at-home investors. This includes willfully slothful Couch 
Potato investors, at least the ones who were only willing to 
divide by 2 with the aid of an electronic calculator.

The Original Couch Potato portfolio, which I've been writing 
about for 14 years, returned only 3.65 percent. Large-cap 
stocks continued to underperform small- and mid-cap stocks. 
And a year of rising interest rates dulled the bond market. 
The Original Couch Potato is one-half Vanguard 500 Index 
fund and one-half Vanguard Total Bond Market Index fund.


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The newer Crispy Couch Potato portfolio, which uses the Van-
guard Total Stock Market Index and the Vanguard Inflation 
Protected Securities fund in a 50/50 mixture, did somewhat 
better. It returned 4.22 percent for the year.

But if you were willing to divide your money by 3 instead 
of 2, the Margarita portfolio (one-third each Vanguard Total 
Market, Vanguard Total International Stock and Vanguard In-
flation Protected Securities) returned a very nice 8.01 per-
cent. The 15.6 percent return provided by international 
stocks saved the year.

Further diversification (and dividing by bigger numbers) 
brought mixed results. While Vanguard REIT index fund and 
Vanguard Energy returned 11.9 percent and 44.6 percent, 
respectively, the American Century International Bond fund 
lost 8.2 percent as the dollar came out of its funk and 
blasted ahead of the euro.

As a consequence, the Four Square portfolio returned only 
3.96 percent when Vanguard Total Market, Vanguard Total 
International Stocks, Vanguard Inflation Protected Securi-
ties and American Century International Bond were mixed 
in equal proportions.

When Vanguard REIT index fund was added to create the 
Five Fold portfolio, the return rose to 5.55 percent, 
buoyed by the 11.9 percent return of the REITs.

Finally, when Vanguard Energy fund was added to create 
the Six Ways portfolio, the 44.6 percent return of the 
energy fund took the portfolio return up to a handsome 
12.06 percent.

Significantly, every asset class represented here but 
one can be done with an index fund or an exchange-traded 
fund (ETF) -- except one. I put American Century Inter-
national Bond fund, the one that lost 8.2 percent, into 
this mix because I was looking for alternatives to U.S. 
dollar denominated bonds.


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Was it a mistake?

Long term, probably not. But the idea may be better than 
the fund. Then, and now, I would rather use an unmanaged 
international bond index with a broader currency reach 
if one were available. BEGBX, by its construction, is 
overweighted in the euro, which fell dramatically after 
three years of rising against the dollar. With new ETFs 
being registered every month, I would not be surprised 
if an international bond index became available sometime 
in 2006.

Are there any messages here?

Yes. Diversification pays. The more diversified portfolios 
did better than the basic two-fund Couch Potato portfolios.

(Investor's Insight reflects the opinions of experts. It does 
not recommend any specific investments, and no endorsement is 
implied or should be inferred. For more information, contact 
the individual firms cited).



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