Can You Be a Coffee Can Investor?
Invest like a 6 year-old
I have a 6 year-old daughter. She believes she has a firm grasp of the world, from the valuable lessons she’s learned from Peppa Pig and Bluey, and her daddy needs to be educated constantly about all the things she “knows”.
I was in the office of a local Hard Money lender last week and he shared a large nugget of wisdom with me. He tossed his spare change into a piggy bank and when it filled up he would buy dividend paying stocks for his son. Yes, the dividends were reinvested. And when that piggy bank filled up he would put it in his son’s custodian account, and buy more shares on the dip. On and on, compounding day after day, month after month, year after year while his son was growing up. Can you guess what kind of head start his son received from dad’s pocket change?
Let’s just say 6 figures!
So I’m thinking the other day, how do I get my 6 year-old excited about learning investing fundamentals? You can bet she will be playing Monopoly and the Cash Flow boardgame, but let’s start investing together now, and make it a fun activity.
The Coffee Can Approach
Originating from the days when people would literally bury their valuables in a coffee can and forget about them, this approach emphasizes the importance of patience, discipline, and a buy-and-hold mentality. Even my father had a Foldgers coffee can sitting around with his spare change; I don’t think he buried it and forgot about it but same idea.
Principle 1: Buy and Hold:
The foundation of the Coffee Can Approach is the idea of buying high-quality investments and holding onto them for an extended period, often years or even decades. This long-term perspective allows investments to compound over time, taking advantage of the power of compounding interest. Instead of constantly buying and selling, investors following this approach remain committed to their chosen assets, which reduces transaction costs and taxes, ultimately leading to higher returns.
Principle 2: Diversification:
Diversification is another crucial aspect of the Coffee Can Approach. By spreading investments across various asset classes, industries, and geographic regions, investors can mitigate risk and reduce the impact of individual investment underperformance. This principle ensures that one poorly performing investment does not derail the entire portfolio, promoting stability and long-term growth.
Principle 3: Low Turnover:
The Coffee Can Approach encourages minimal portfolio turnover. In contrast to active trading, which can result in higher fees and taxes, this strategy minimizes costs and disruptions. Lower turnover also means less emotional decision-making, as investors are less likely to react impulsively to short-term market fluctuations.
Principle 4: Discipline:
One of the greatest challenges in investing is maintaining discipline during market turbulence. The Coffee Can Approach instills discipline by encouraging investors to stick to their chosen investment strategy and avoid making impulsive decisions based on fear or greed. This disciplined approach helps investors weather market downturns and capitalize on long-term growth opportunities.
Benefits of the Coffee Can Approach:
- Reduced Stress: By eliminating the need for constant monitoring and trading, the Coffee Can Approach reduces the stress associated with short-term market fluctuations.
- Lower Costs: Minimal portfolio turnover results in lower transaction costs and taxes, maximizing returns over time.
- Long-Term Growth: The power of compounding interest can lead to substantial wealth accumulation over the years, making this approach ideal for achieving long-term financial goals.
- Risk Mitigation: Diversification and a focus on high-quality assets help protect the portfolio against market volatility.
- Time Efficiency: The Coffee Can Approach requires less time and effort than active trading, making it suitable for busy individuals.
I coffee canned a stock back in 2016. I purchased AbbVie because I was annoyed by the cost of their pharmaceutical products that we were required to purchase – If you can’t beat them join them! ABBV is a decent company that pays a nice 4% dividend. My original investment was about $5000 and the current market value of the stock today is over $21,000, and my dividends have purchased another 37 shares for me. So that’s over a 20% return yearly for sitting around and literally forgetting that I even owned the stock!
In a world where the allure of quick profits often leads to risky decisions, the Coffee Can Approach serves as a reminder that slow and steady wins the race in the world of investing.
Maybe a lesson that I can teach a “very wise” 6-year old?
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Best,
Derek
Derek Petersen
Chief Compounding Officer
Aviara Capital Investments
www.AviaraCapitalInvestments.com
www.linkedin.com/in/derekpetersen
Disclaimer: I am a financial independence guy and a financial freedom hack. I am not a financial advisor, a CPA, or a broker of anything. I recommend discussing financial decisions and/or planning with the professionals.