Credit: Shutterstock photo(Published on Feb. 22 by Bob Ciura)
The idea for the Coffee Can portfolio traces its roots back to the Old West when people would secure their valuables by putting them in a coffee can.
The coffee can was then placed under their mattress for safekeeping, where it stayed for years or even decades.
While the idea might seem outdated in the modern age of the internet and online trading, its lessons stand the test of time.
What is the Coffee Can portfolio?
The downside of investing in actively managed funds is that they generate considerable fees.
For example, some funds have a front-end load or a back-end load, which is basically money paid for investing or divesting from the fund.
In addition, funds typically charge expense ratios - some can be in excess of 1% annually.
If that weren't bad enough, actively managed funds have high rates of portfolio turnover, which can generate tax liabilities.
Lastly, there are the transaction fees charged by brokers, for buying and selling funds.
A few percentage points may not seem like much, but it can really add up over time. Here's an illuminating quote from the original Coffee Can Portfolio article, written by a professional money manager:
Those frustrated by the seemingly never-ending barrage of fees can take solace in the fact that there could be a better way.
Enter the Coffee Can portfolio.
At the heart of the idea is that investors are collectively paying professional money managers a fortune for performance that in many cases is subpar.
The article linked above concludes with a powerful statement, regarding the exorbitant fees charged by fund managers:
Instead, investors can craft a portfolio of large, blue-chip stocks and simply hold them forever. The idea is to never sell these investments, which serves several purposes.
First, investors will avoid fees and costs that eat away at total returns.
Second, investors will let compounding interest work its magic.
The Coffee Can portfolio: needed now more than ever
Investors are notoriously bad at leaving their portfolios alone. Much of this is not our own doing; the financial media shares the blame.
With the onset of the 24-hour news cycle, investors are inundated with analyst upgrades and downgrades, stock rumors and an obsession with short-term performance.
This is all dangerous to your portfolio's health.
The financial industry feeds off our inner desire to "keep up with the Joneses." Investors have a tendency to set unrealistic goals for their investment portfolios. At this point, professional money managers convince us that only they are equipped to get us where we want to go.
Add to this an illogical focus on short-term results rather than on investing over the long haul.
The Coffee Can portfolio theory advocates buying stocks with the intention of holding them for years, not days. From the article:
Essentially, the Coffee Can portfolio rescues us from our own bad habit - the instinct to trade stocks rather than invest in them.
However, in order for the Coffee Can idea to succeed, investors will need to adopt a long-term focus. They will need to take control of their financial matters, which could present some complications.
Potential drawbacks
To be sure, the Coffee Can portfolio is not without its limitations.
Investors should not confuse this for willingly abdicating control of their portfolios to someone else - we all need to take an active role in our own financial lives.
The Coffee Can portfolio will only add to the need to take control because investors will have a hard time finding an outside adviser to help them construct and manage the Coffee Can portfolio.
After all, the money management industry seems to care more about assets under management - which generates higher fees and commissions - than about performance itself.
The article acknowledges that investors will be hard-pressed finding a Coffee Can portfolio from a professional money manager:
What this means is that investors assuming their financial adviser will help them craft a Coffee Can portfolio are likely to be disappointed.
But the higher level of responsibility involved can also be liberating - it saves investors from the outrageous fees charged by professional money managers.
Final thoughts
For investors looking to start a Coffee Can portfolio that can generate excellent returns over time, without the fees of a professional money manager, start with the Dividend Kings.
The Dividend Kings are a select group of stocks that have raised their dividends for the past 50 consecutive years.
You can see the entire list of Dividend Kings here.
Dividend growth stocks, like the ones that populate the list of Dividend Kings, have trounced the Standard & Poor's 500 over long periods of time.
The beauty of owning individual stocks is that there are no fees or commissions to eat into your returns.
The key takeaway is that the Coffee Can portfolio is an attainable idea for every single investor.
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This article first appeared on GuruFocus .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
