The Couch Potato Portfolio

Developed by Scott Burns in January 1985, the Couch Potato Portfolio can be created with 2 ETFs. In designing the portfolio, he said that the selection of the specific ETFs isn't overly important. What is important is that one ETF comprises a broad selection of bonds, while the other comprises a broad selection of stocks. A typical design of the portfolio would be the VTI (Vanguard US Total Market) and TIPS (iShares all bond fund). This portfolio has a 20-year 7.41% compounded annual return and a max drawdown of 27.04%.

In my variation of the Couch Potato Portfolio, I am going to have a 50% weighting to VOO (S and P 500) and SHY (1-3 year US Treasury Bonds). I could only view SHY back 15 years, and over that timeline the annual return of this portfolio has been just 1.26%. Compounded with the 14.41% of VOO, this equates to a 7.8% annual return for my Couch Potato portfolio. The argument against SHY is that its returns often lag inflation, which judging by the returns over the last 15 years, is true. But this year, it has not been true, with a 4% YTD return. In any case, my point for holding the SHY is to protect myself against a significant market drawdown. In fact, the maximum drawdown the SHY has ever had, is -5.7% (in 2022). During 2008, when VOO declined 55.7%, the SHY increased 3%. So, in 2008 or 2022, SHY would have significantly reduced my drawdown risk.

In time, if we are entering a period of high-inflation and correspondingly high interest rates, the SHY may begin to lag inflation. If this was the case, it would be easy for me to sell this through my Interactive Brokers account. The most significant aspect of holding the SHY is that it brings down the beta of my portfolio to 0.62, or a 38% lower volatility than the equity market. It is also a possible idea that I could dollar-cost-average into VOO. So, I would transfer all my money over to Interactive Brokers in December and put 50% of it into SHY and only 25% (for now) into VOO. I could wait for 6 months to a year before I put the other 25% into VOO. Or better yet, we could enter a market correction, and I buy VOO at the bottom (although the chances of anyone picking the bottom of a correction are very slim).

No matter how I do it, I think my variation of the Couch Potato Portfolio is a good one. It has a 2.45% net yield, which does lag inflation but would provide the investor with income. Beyond this, the long-term capital return of the portfolio (largely thanks to the VOO holding) should give the investor a decent retirement fund.