A 50% portfolio solution

A few weeks ago, I had the pleasure of talking with Scott Burns, the father of the Couch Potato investing strategy. If you’re a regular MoneySense reader, you know that we’ve been writing for more than a decade about this simple way to build a low-cost, well-diversified portfolio. But although we’re long-time champions of the strategy, we didn’t invent it. Burns did—more than 20 years ago.

Back in 1991, Burns was a financial journalist at The Dallas Morning News. That was a different era in the investment industry, he told me. No one invested online, and exchange-traded funds (ETFs) barely existed. Brokers routinely made cold calls to “the man of the house” to pass along stock tips. If a husband wanted to discuss the investment with his wife, the broker would say, “Come on, Mr. Jones, who wears the pants in your family?” I wish I was making this up.

Burns offered an alternative. The Couch Potato portfolio, he wrote in his first article, was “a surefire formula to invest your money, enjoy a return that will put you in the top half of all professional investors, but expend virtually no effort or thought.” Here’s how it worked: you put half your money into an index fund that tracked the broad stock market. You put the other half in an index fund that tracked the bond market. Once a year, you rebalanced the portfolio to get it back to 50-50. That’s it. No complicated portfolio moves, no big gambles on a few stocks or sectors—just half stocks, half bonds. Call it the 50% solution.

I don’t know how many people followed Burns’s advice back in 1991, but I’m guessing it wasn’t many. Most people probably thought it sounded embarrassingly simplistic. And I’m sure Mr. Jones’s broker would have mocked anyone who mentioned it. But here’s the thing: anyone who did follow the strategy with Vanguard index funds would have earned a return of 7.1% annualized. That would have almost quadrupled every dollar invested over that 20-year period.

A 50-50 blend of Canadian stocks and bonds would also have done extremely well: the two indexes (ignoring costs) returned 8.6% annualized for the 20 years ending in 2011. Even if we subtract a full percentage point for costs, how many Canadians can report that they earned returns in this neighbourhood over the last two decades?

And it’s not just the last 20 years. According to the Vanguard Group, an ultra-boring 50-50 portfolio would have delivered an annual return of 8.3% (again, before costs) going all the way back to 1926. That sample includes the Depression, two world wars, and disco.

All of which is to say that investing should be head-smackingly simple. Anyone who gets long-term, low-cost exposure to the stock and bond markets should easily meet their financial goals. And yet sticking to a simple, proven investing strategy for a lifetime is surprisingly hard to do. As the Couch Potato enters its third decade, we can all heed its lessons: investing doesn’t need to be complicated. Markets work, costs matter, and you can reach your goals—without magic.

Regular readers will notice a different face on this page. Duncan Hood, who has been part of the MoneySense team for more than seven years, has left us to sit in the captain’s chair of our sister publication, Canadian Business. I’ll be filling in for a couple of issues until the magazine finds a permanent replacement. MoneySense enjoyed great success under Duncan’s leadership, including being named Canada’s Magazine of the Year in 2011. We wish him continued success in his new role.