What is couch-potato investing strategy? Is it right for you?

Summary

  • Couch-potato is a passive investing strategy that works best for investors with a long-term horizon, who are willing to leave funds alone.
  • The strategy is designed for an investor interested in only annual monitoring of investment portfolio.
  • It calls for splitting one's holdings equally between equities and debt.

Investing is all about having a good strategy. Be it creating a retirement portfolio or other investment targets, investors with sound investing approach can meet their goals faster. However, there are different kinds of investors and each one has his/her own calculations and goals.

                         

What is couch-potato investing strategy? Is it right for you?

 

Thus, no silver bullet strategy suits all. If you are someone with a long-term horizon and willing to leave funds alone, couch-potato is a passive investing strategy that might work best for you.

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What is couch-potato investing?

Couch-potato is a passive investing strategy designed for an investor interested in only annual monitoring of investment portfolio. It can also be simply explained as putting one’s investments on autopilot using a lazy portfolio strategy.

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A couch-potato investor does not make frequent changes to his investment portfolio based on changes in the stock market. He would generally check in once a year and make the needed adjustments. The strategy is not for an active investor who tracks and reacts to the stock market.

How does couch-potato strategy work?

The investing strategy and is all about developing a portfolio which doesn’t requires a hands-on approach. It calls for splitting one's holdings equally between equities and debt.

While stocks drive growth, debt serves to balance out stock risk and market volatility. Thus, the portfolio could be a relatively low-cost affair and demand minimal effort from investors.

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Depending on your investment goals and risk appetite, you can use different allocations. For instance, you may have two or three funds.

While the one represents the overall US stock market, the other represents the global stock market with a focus on debt. Investors can also maintain diversification by selecting the right funds.

At the start of each year, investors need to divide the total portfolio value by two. Then they would rebalance the same by putting half funds into common stocks and the other half into bonds.

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Key takeaways

  • The investing strategy only requires annual monitoring and rebalancing.
  • The strategy is seen to offer significant returns in the long run.
  • Such portfolios invest equally in two assets -- common stocks, and bonds (via index funds or ETFs). They maintain this 50/50 split throughout the year.
  • While equities drive growth, debt provides protection against market volatility.
  • The portfolio falls less than the stock market during bearish scenario but also appreciates less in bullish markets.

What should investors do?

This investing approach allows investors to take a set-it-and-forget-it approach to portfolio building. Those investors looking for less time-intensive ways to invest can adopt this strategy.

However, it is critical to weigh its pros and cons against your investment goals before adopting the same. It is better to consult your financial advisor before you move forward with couch-potato investing approach.

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