Scott Burns’ Couch Potato Portfolio Overview
Background and Philosophy
The Couch Potato Portfolio was introduced in 1991 by Scott Burns, a well-known finance columnist and co-founder of AssetBuilder.com. Burns is a proponent of simple, low-cost, and passive investing strategies. His philosophy revolves around minimizing effort and costs while achieving market returns through broad diversification. The Couch Potato Portfolio is designed for investors who prefer a “set it and forget it” approach, emphasizing long-term growth with reduced volatility.
The portfolio’s core principle is a 50/50 split between stocks and bonds, where stocks (represented by VTI) drive returns, and bonds (represented by TIP) provide stability and downside protection. This balanced approach aims to mitigate risk while still capturing market gains over time.
Asset Allocation, Diversification, and Risk
The Couch Potato Portfolio consists of two key holdings:
- VTI (50%): Vanguard Total Stock Market ETF, providing exposure to the entire U.S. equity market, including large-, mid-, and small-cap stocks. This ensures broad diversification within the stock portion of the portfolio.
- TIP (50%): iShares TIPS Bond ETF, which invests in Treasury Inflation-Protected Securities (TIPS). These bonds are designed to protect against inflation, making them a conservative yet effective hedge during economic uncertainty.
Diversification: The portfolio is well-diversified across asset classes (stocks and bonds) but lacks international exposure. Investors seeking global diversification may consider adding an international stock ETF (e.g., VXUS) to the mix.
Risk Level: The 50/50 allocation makes this a moderate-risk portfolio. While stocks offer growth potential, bonds reduce volatility, making it suitable for investors with a balanced risk tolerance.
This portfolio is just a more conservative portfolio than a standard 60% stocks 40% bonds. You can find various index funds including VSMGX (VANGUARD LIFESTRATEGY MODERATE GROWTH FUND INVESTOR SHARES) and VBINX (VANGUARD BALANCED INDEX FUND INVESTOR SHARES).
Pros:
- Simple and easy to manage.
- Low-cost due to the use of index ETFs.
- Bonds provide stability during market downturns.
Cons:
- Limited international diversification.
- May underperform during strong bull markets due to the high bond allocation.
Application for Retirement Accounts (401(k) and IRA)
The Couch Potato Portfolio can be easily implemented in 401(k) or IRA accounts. Here’s how:
- Identify Equivalent Funds: In a 401(k), look for funds that closely match VTI (e.g., a total U.S. stock market index fund) and TIP (e.g., an inflation-protected bond fund). If exact matches aren’t available, use the following alternatives:
- For VTI: A large-cap index fund (e.g., S&P 500 fund) paired with a mid/small-cap fund to approximate total market exposure.
- For TIP: A general bond fund or intermediate-term Treasury fund if no TIPS fund is available.
- Adjust for Missing Asset Classes: If a 401(k) lacks certain funds (e.g., TIPS), allocate that portion to the nearest available bond fund. For missing stock funds, default to a broader U.S. equity fund.
- Rebalance Annually: Maintain the 50/50 allocation by rebalancing once a year to align with the target mix.
Note: This portfolio utilizes Inflation-protected bonds as fixed income. But one can achieve a better balance in the fixed income side by spreading to normal intermediate bond funds such as VBMFX or BND and TIP, such as 25% each.
Rule of Thumb:
- For stock funds, prioritize index funds, especially low-cost index funds
- For bond funds, prioritize core bond funds or high-quality actively managed total return bond funds (if available).