Investing in the stock market can seem like a daunting task, with endless options to choose from and the constant fluctuations of the market. However, a simple yet effective investment strategy that has stood the test of time is the "Coffee Can Portfolio." This approach involves selecting a set of stocks and holding onto them for a long period of time, without making any changes or adjustments. In this blog post, we'll explore the advantages of long-term investing and how the coffee can portfolio can be a smart investment strategy.
What is a Coffee Can Portfolio?
A coffee can portfolio is a term that was first introduced by Robert Kirby, a financial advisor, and author. The concept was inspired by the practice of storing valuables in a coffee can for safekeeping. The idea behind the coffee can portfolio is to select a set of stocks that have the potential to provide consistent long-term growth and then hold onto them for a long period of time, without making any changes or adjustments.
The Advantages of Long-Term Investing
One of the biggest advantages of long-term investing is the power of compounding.
- Compounding is the ability of an investment to generate earnings on its earnings. By reinvesting your earnings, your portfolio has the potential to grow exponentially over time. The longer you hold onto your investments, the more time you give your portfolio to compound, which can result in significant gains.
Another advantage of long-term investing is that it allows you to weather market fluctuations. In the short term, the stock market can be unpredictable and volatile. However, over the long term, the stock market has historically provided positive returns. By holding onto your investments for the long term, you can avoid making impulsive decisions during market downturns and instead wait for the market to recover.
You can read more about the Coffee Can Portfolio in Kirby's original paper
The Coffee Can Portfolio in Action
The coffee can portfolio can be a simple and effective way to invest for the long term. To create a coffee can portfolio, you would start by selecting a set of stocks that you believe have the potential for long-term growth. You would then invest equal amounts of money into each of these stocks and hold onto them for a long period of time, without making any changes or adjustments.
One of the most famous examples of a coffee can portfolio is the one created by Kirby himself. In 1984, Kirby created a portfolio of 10 stocks that he believed had the potential for long-term growth. He then held onto these stocks for 10 years without making any changes or adjustments. By the end of the 10-year period, Kirby's coffee can portfolio had outperformed the S&P 500 index by a wide margin.
Beat the hedge funds
Long term investing can even provide an advantage to average investors over hedge funds that are focused on quarterly targets. While hedge funds are often driven by short-term performance targets, average investors who hold onto their investments for the long term can take advantage of the power of compounding and avoid making impulsive decisions based on short-term market fluctuations. By investing in a diversified portfolio of stocks and holding onto them for a long period of time, average investors can potentially outperform hedge funds that are focused on quarterly targets. This can result in higher returns and a more successful investment strategy over the long term.
A 10% decline in the market is fairly common—it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefitting from the wealthbuilding power of stocks.
- Christopher Davis
Long story short
By selecting a set of stocks and holding onto them for a long period of time, investors can take advantage of the power of compounding and avoid making impulsive decisions during market downturns. While the stock market can be unpredictable in the short term, history has shown that over the long term, the stock market has provided positive returns. Therefore, if you're looking to invest for the long term, the coffee can portfolio could be a smart strategy to consider.