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Best of all, like an ideal houseplant, this portfolio thrives on neglect.
It performs superbly even if you pay attention to it for only 15 minutes a year. It’s based on the simple fact that the market is smarter than any single individual.
There are people out there, and we’ve met plenty of them, who spend hours every week sweating over their investments.
Some of these investing junkies actually seem to enjoy reading balance sheets and analysts’ opinions. We want good performance with low risk — but between our jobs and our families we don’t have a lot of time to follow the market.
All that buying forces up the price of the stock until it’s trading for what most investors believe is fair value.
Similarly, if the pros believe a stock is overvalued, they sell it and keep on doing so until the stock meets their definition of fair value.
Assuming typical rates of return, the money you would save by becoming a Couch Potato would be more than enough to buy you a luxury car in 10 years’ time even if you were never to invest another cent in your portfolio.
On any given day, thousands of highly paid, highly competitive mutual fund managers and pension fund experts are scouring the market looking for bargains.
When they think a stock is undervalued, they buy it.
We usually recommend that Couch Potato investors follow a classic balanced strategy, which consists of putting 60% of your money in stocks and 40% in bonds, but you may want to adjust the stock component upward if you’re young and willing to take on additional risk in pursuit of larger returns.
Conversely, you may want to dial down the stock portion if you’re older and more conservative.
Over any period of a few years or more, about 80% of actively managed mutual funds lag behind the market.