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Investment Basics: The Coffee Can Method

wall streetInvestment expert Chris Mayer told Washington Post readers that the time-honored investment advice of ‘buy low and sell high’ is “the opposite of what you should do.” He related a story of a fund he admires and noted that even people making smart money moves will still lose money sometimes.

One important point Mayer makes for investment newbies is that “most people trade way too much.” In their zeal to be informed and active investors, some people do a lot of research and then feel they must act on all of the information they take in. Since there are fees that go with each trade and there are often taxes as well, people who panic and trade often may not reap the kind of profit they hope.

This is where the idea of a “coffee can portfolio” comes into play. Perhaps this sounds like old-fashioned advice along the lines of hiding your money under a mattress, but it isn’t folk wisdom; this idea comes from a Robert Kirby, a money manager. “The strategy simply amounts to buying stocks and socking them away in a proverbial coffee can for 10 years. Kirby explains that the idea harkens to the Old West, when people used to put their valuables in a coffee can and hide it somewhere.”

Kirby was surprised to find that a client had ignored his firm’s advice on which stocks he should sell and instead had put similar amounts of money in each stock the firm recommended and then left those investments alone for a decade. Kirby, the professional, found that the client had done quite well by only following half of his advice. He learned of this client’s strategy after the client’s wife inherited his portfolio

Why did this method work so well? It worked because: “The success of this portfolio depends entirely on what you initially put it in.”

And unlike hiding money under a mattress, the coffee can method hides money away with the promise of earnings. Money hidden under a mattress earns little.