If you hate the constant need to adjust your portfolio based on stock market news and economic developments, do not like to pay huge fees to active fund managers who promise those elusive hefty returns and want to set your stock investing on auto pilot, you are not alone. There’s a comprehensive stock investing strategy designed for people who want to take a long-term horizon for their investments and don’t want to waste their time, energies and money on daily, active portfolio management. Personal finance writer named Scott Burns is behind this investment philosophy which is now very popular all over the world. The reason why couch potato investing strategy got traction and gained popularity is simple: it works.
Scott Burns posts the annual performance of the couch potato investing strategy every year. For 2022, Burns posted some numbers that yet again testify to the effectiveness of couch potato investing. Burns started his report with some assumptions before giving some juicy numbers.
“Imagine you retired at the dawn of history, recently estimated as 1988, at age 65. You started your retirement with a $100,000 portfolio split between the total domestic stock market and the total domestic bond market. To pay the bills, you intended to use the 4 percent spending rule. You took an inflation-adjusted amount at the end of each year.”
After that Burns asks his readers to guess how much money this portfolio would have made after 35 years? According to him, by simply following the couch potato investing strategy (index investing), the initial $100,000 would stand at $728,880 as of the end of 2022. But Burns noted that this estimate does not take into account the “sequence of returns risk.” What does that mean? Simply put, like every portfolio, a couch potato portfolio would not post consistent or uniform returns. Some years it’d perform very well, some years it would disappoint. For example, in 2021 the couch potato stock portfolio would have been worth $884,481 according to Burns’ estimates. That means the portfolio worth declined in 2022. But Burns insists we should have a holistic approach in evaluating this strategy.
“But so what? The portfolio is way larger than expected or needed,” Burns added.
Retirement in 2023: Recommendations from a Couch Potato Investor
At the end of the report Burns recommended investors who are retiring in 2023 to tighten their belt and don’t withdraw too much from their retirement savings. To be specific, Burns said your spending should be less than 4% of your retirement portfolio worth. Burns also said that if inflation starts to drop in 2023 and stocks see a recovery, things could easily get back to normal and 2022 would be nothing more than a “bad memory.” However, if inflation does not come down, Burns believes things could change drastically in the retirement space.
“But if inflation continues high and stock prices fall further, we’re in for a sea change in retirement security.”
Another proof of the effectiveness of the couch potato investing strategy can be seen in the SPIVA reports. SPIVA reports are published by the S&P Dow Jones Indices to compare the performance of active equity and fixed-income mutual funds against their benchmarks. According to the 2021 SPIVA report, a whopping 79.6% of domestic equity funds lagged the S&P Composite 1500. The report also shows that large-cap funds continued their underperformance for the 12th consecutive calendar year, as 85% of active large-cap funds trailed the S&P 500 in 2021. The report also shows a graph about the percentage of domestic equity funds underperforming the S&P Composite 1500 on an Absolute Basis. The graph paints a depressing picture for active portfolio management since year after year the underperformance percentage for domestic equity funds seems to increase.
The report says:
“Fund managers often respond to evidence of active underperformance by claiming to offer better returns per unit of volatility (i.e., to outperform in risk-adjusted terms). This would be an appropriate counterargument, if only it were true. However, the data shows that the vast majority of actively managed funds underperformed on this metric as well. Among domestic equity funds, while 90%have underperformed the S&P Composite 1500 over the past 20 years, an even greater 95% did so on a risk-adjusted basis.”
Another important aspect of the couch potato investing strategy is having a long-term outlook. You cannot be a couch potato investor if you cannot remain invested in a certain index fund for years. A famous study in this regard is one by finance professors Hendrik Bessembinder of Arizona State University, Michael Cooper of the University of Utah and Feng Zhang of Southern Methodist University. The study found that only 46% of managed funds outperformed the total market over monthly horizons; 39% beat the market over 12-month periods; 34% over decade-long horizons. As you can see, when holding periods increase, managed funds’ performance declines.
While the couch potato investing philosophy tends to stay away from individual stock investing and promotes index investing, for this article we picked some stocks that are the top holdings of index funds loved by couch potato investors. These include Vanguard Index 500 Fund (VFIAX), Vanguard Total Stock Market (VTI), and iShares Core Growth ETF (XGRO), which is very famous among Canadian couch potato investors.
Couch Potato Stock Portfolio: 10 Best Stocks To Buy
Investing in oil giant Exxon Mobil Corporation (NYSE:XOM) comes with regular dividend payments and stock price appreciation prospects. What else does a couch investor need? Exxon Mobil Corporation (NYSE:XOM) has gained about 29% over the past five years and the company has upped its dividends for 39 straight years.
A total of 73 hedge funds in Insider Monkey’s database of 943 hedge funds had stakes in Exxon Mobil Corporation (NYSE:XOM) as of the end of the first quarter. The biggest stakeholder of Exxon Mobil Corporation (NYSE:XOM) during this period was Rajiv Jain’s GQG Partners which owns a $2.15 billion stake in the company.
iShares Core Growth ETF Portfolio (XGRO) is extremely popular among couch potato stock investors on the internet, especially among the Canadian couch potato investing community. The top holding of XGRO is iShares Core S&P Total US Stock Mkt ETF (ITOT). Tesla Inc. (NASDAQ:TSLA) is a significant holding of ITOT, as well as many other index funds including Vanguard U.S. Total Market Index ETF (VUN), the Vanguard Index 500 Fund (VFIAX) and Vanguard Total Stock Market ETF (VTI).
As of the end of the first quarter of 2023, 82 hedge funds tracked by Insider Monkey had stakes in Tesla Inc. (NASDAQ:TSLA). The biggest stakeholder of Tesla Inc. (NASDAQ:TSLA) is D E Shaw which had a $1.3 billion stake in the company.
Berkshire Hathaway Inc. (NYSE:BRK-B) is a conglomerate that is invested in a variety of businesses, including railroads, insurance, retail, apparel, electrical power and utilities. Investing in Berkshire Hathaway Inc. (NYSE:BRK-B) gives exposure to a lot of lucrative business areas without any need for active management or maneuvers, which makes the stock one of the ideal picks for any couch potato stock investor. Berkshire Hathaway Inc. (NYSE:BRK-B) is also among the top holdings of Vanguard U.S. Total Market Index ETF (VUN), the Vanguard Index 500 Fund (VFIAX) and Vanguard Total Stock Market ETF (VTI).
Out of the 943 hedge funds in Insider Monkey’s database of 943 funds, 108 hedge funds were long Berkshire Hathaway Inc. (NYSE:BRK-B). The biggest stakeholder of Berkshire Hathaway Inc. (NYSE:BRK-B) was Michael Larson’s Bill & Melinda Gates Foundation Trust which had a $6 billion stake in the company.
With over a decade of consistent dividend increases and dominance in the healthcare insurance sector, UnitedHealth Group Inc. (NYSE:UNH) is one of the best picks for any couch potato stock portfolio. Over the past five years, UnitedHealth Group Inc. (NYSE:UNH) has gained about 92%. The company is operating in a sector that is shielded from economic volatility and recessions relatively speaking.
That’s why hedge funds were upping their bets on UnitedHealth Group Inc. (NYSE:UNH) earlier this year. A total of 116 hedge funds in Insider Monkey’s database had stakes in UnitedHealth Group Inc. (NYSE:UNH), up from 110 funds in the previous quarter. The biggest stakeholder of UnitedHealth Group Inc. (NYSE:UNH) was Rajiv Jain’s GQG Partners which owns a $2.3 billion stake in the company.
Apple Inc. (NASDAQ:AAPL) is the biggest holding of the Vanguard Index 500 Fund (VFIAX) and many other major total market funds. Apple Inc. (NASDAQ:AAPL) is one of the best stocks to buy for those who want to apply the couch potato investing strategy. Over the past five years, Apple Inc. (NASDAQ:AAPL) has gained about 271%. In addition to the stock price gains, Apple Inc. (NASDAQ:AAPL) has rewarded investors with regular and growing dividends over the past decade. That’s why hedge funds are also big fans of Apple Inc. (NASDAQ:AAPL), the biggest of them being Oracle of Omaha Warren Buffett, who has a $151 billion stake in the company as of the end of March.
Silver Ring Value Partners made the following comment about Apple Inc. (NASDAQ:AAPL) in its Q1 2023 investor letter:
“Exited the Apple Inc. (NASDAQ:AAPL) put options position, as I came to the conclusion that I was wrong about the degree to which the stock is overvalued. While I still believe it’s optimistically priced, the fundamentals over the last few years made me believe that my initial decision to buy the put options was wrong.”
