You must have heard the term coffee can portfolio several times.
What is a coffee can portfolio? It may sound a bit confusing!
Well, it is just an investment strategy.
Coffee can portfolio is a great way of multiplying your wealth by still keeping a low-risk profile. If you have no idea about this term, don’t worry we have got your back. Here is everything you need to know about a coffee can and how to build it. Keep reading to know more!
What is a coffee can portfolio?
This portfolio follows a buy and forget approach when it comes to investing. Investors purchase stocks of companies that performed outstandingly well for a consistent period. After this, forget the stock for 10 years and refrain from actively buying or selling them. This type of investing is known as a coffee can portfolio.
After the end of this 10-year horizon, some of the stocks will be in loss; some will be stagnant, while a few may grow to a great extent, providing you with amazing returns. While the process sounds simple, it requires a great deal of patience to leave the stocks untouched for a prolonged time.
History of coffee can portfolio
Before banking became widespread, people put money and valuable items in coffee cans and kept them in a safe space in their houses. In 1984, this term first came into use for investing. Similar to the use of coffee cans, investors choose some high-performing stocks, invest in them and hold them for a long time. Just like you put the money in a coffee can and forget about it, investors follow the same approach with these investments.
Building a coffee can portfolio
Investing in stocks can be tricky for sure. To create a well-rounded portfolio, one must do extensive research and be aware of the current market trends. So when it comes to building a coffee can portfolio in 2023, how will you go about it?
Here are the five basic steps that you need to keep in mind before building a portfolio:
- Ensure that the company has been in existence for more than 10 years. Also, they should be the market leaders for a long time in the industry.
- Use a portfolio screener to filter out the companies. Set the market cap to mid-cap or marge-cap. You can even select companies based on the sector.
- The return or capital employed or ROCE is a difference between the total current liability and assets. Add the ROCE filter and set it to 15% or above. The higher the ROCE, the more profitable the company has been for its shareholders. By applying this filter, you can access companies with stable financial positions.
- Next, select the five-year historical revenue. This filter gives you a list of companies that have high annual compounded revenue growth rates.
- Select companies from different sectors to diversify your investments. Make a list of the top-performing stocks. You can apply a filter for various things to simplify the process.
Benefits of a coffee can portfolio
Investing in a coffee can portfolio has several benefits. If you follow the right steps, you can benefit exponentially from this type of investing. Let us look at some advantages of creating a coffee can portfolio:
Trading costs
There is no need for frequent trading in this case. Coffee can require investors to hold the money for a long time. This ensures that there is no trading often which reduces trading costs like brokerage fees, commissions and more.
Tax benefits
If you invest in stocks often, you may already be aware that short-term investments require more taxes. However, long-term investments are different. Eventually, the coffee can portfolio would lead to lower investment tax liabilities.
Market volatility
Since investors need to hold the stocks for the long-term, they can easily avoid market volatility and save themselves from short-term fluctuations.
Returns
It is a well-known fact that the stock market provides greater returns compared to fixed deposits or even real estate. Long-term investments also ensure tremendous returns. With a little patience, investors can multiply their wealth to an unimaginable extent.
Capital appreciation
When you leave the stocks untouched for 10 years straight, they grow in value and appreciate over time. Since no active selling or buying gets involved, capital appreciation is a sure-shot thing.
Simplified investing
The best thing about coffee can investing is that it simplifies the stocks. You do not have to monitor the stocks or track the fluctuations constantly. This factor makes investing less stressful and allows investors to focus on other things.
Well-established companies do not get disrupted by their competitors. Having such companies in the portfolio, in the long run, will always put you in a position of benefit. In ancient times, the measure of an empire’s greatness was depicted by its longevity. Coffee Can investing is an extension of this concept. From neutralizing negatives and getting a high probability of profit to negligible transaction costs, this investment has numerous benefits.
Final words
You may wonder what coffee can portfolio meaning could be. Well it is a low-risk investment strategy. If you wish to get higher returns while playing it safe, a coffee can strategy will work the best for you. All you need is to be patient for ten years and forget about the stocks that you buy. Such portfolios perform even under stress periods.
In this post, we have dealt with the steps that can help you build a coffee can portfolio in 2023. However, you should do your research well before making any investment decisions.
Disclaimer
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.