The Coffeehouse Investor Review

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Millennial Money Snapshot: Don’t trust Wall Street or buy “trendy” sector funds or ETFs – build a low expense ratio market index fund based portfolio split 60% stocks (20% large cap stocks, 20% small cap stocks, 10% REITs, 10% international stocks) and 40% bonds. Overall a diversified portfolio, but likely too conservative for most Millennial investors with a long term horizon.

If you are new to investing and want a short primer on why you should pick a simple investing strategy there are few better books than The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On with Your Life by Bill Schultheis. It is an easy to read guide about setting up an investment portfolio that requires very little maintenance, and will, based on historical performance, achieve solid investment returns over a long time horizon. His approach is based on diversification, mitigating risk, and consistently saving as much as you can in your portfolio to maximize long-term returns.

Although the author was previously a broker at Smith Barney, in The Coffeehouse Investor he spends a lot of time talking about how most investors should simply ignore the institution of Wall Street, which he believes is mostly a big marketing machine trying to sell investors on new “trendy” investment products and the fantasy that any investor can beat the stock market. But in reality it is actually very difficult for not only an average investor to beat the stock market, but even professionals almost never are able to beat the market consistently over time.

The author shares that “Only 14 percent of all managed mutual funds beat the stock market average in each of the last three, ten, and fifteen year periods” and the number is actually likely a lot lower when you take out all the fess and tax liability over this same period (p. 42). There is also some great data in this book where he shows how over any 10 year period over the past 100 years if you would have invested in an index fund that tracked most of the US stock equities market you would have generated a positive return. One example of a fund that tracks the performance of the US stock market is the Vanguard Toal Stock Market Index Fund.

The Coffeehouse “Lazy Portfolio”

In this book Bill Schultheis presents a simple investing plan built on establishing an investment portfolio of low cost index funds that, based on historical performance, will generate positive returns over a long time period (10+ years). In 1999 before the dot-com bust Bill developed what is now known as the Coffeehouse “Lazy Portfolio” approach. During the dot-com bust, Bill’s portfolio which had a make-up of 60% stocks/40% bonds, actually beat  the S&P 500 by 15% over the three year period of 2000-2002 (not a small feat).

Arguably a pretty conservative investment approach, the historical performance of the Coffeehouse portfolio has been strong over time – generating 5%+ over the past 10 years, but it still falls short when compared to investing in a total stock market index fund or S&P 500 fund that track those market indexes. Over the past 10 years (as of 9/4/15) a portfolio with the Coffeehouse portfolio mix of funds highlighted below would have returned an average of 5.57% annually, which falls below the 7.06% annual returns of the S&P 500. Here is an example of the Coffeehouse portfolio made up of diversified low-cost Vanguard index funds (with Bill’s recommended percentage allocation):

40% Vanguard Total Bond Market Index Fund 

10% Vanguard 500 Index Fund

10% Vanguard Total International Stock Index Fund

10% Vanguard Value Index Fund

10% Vanguard Small Cap Index Fund

10% Vanguard Small Cap Value Index Fund

10% Vanguard REIT Index Fund

In my opinion The Coffeehouse Investor approach is too conservative for the average Millennial investor. As a 30 year old investor I have 90% of my long-term investments in equities, which is far greater than the 60% in Bill’s portfolio. While I am taking on more risk, I can still sleep well at night knowing that over the long horizon my portfolio will likely have more volatility, but it will have greater returns (which can compound into even greater returns). I currently have part of my own investment portfolio in low cost index funds like the Vanguard’s Total Stock Market Index Fund (VTSAX) which has a very low expense ratio of $5 per every $10,000 invested (so I can keep more of my money!). Over the past 10 years Vanguard’s stock market index fund has generated 8.33% annual returns (and remember that this was during the time period that included the Great Recession where most portfolios dropped 30+%).

Another highlight of the book for me was his chapter on inflation, which essentially erodes your savings over time, but can be beat with essentially any solid long-term investment approach. It’s a simple fact that the things that you buy today will cost more money in the future and in some cases way more money. So when you save money in a saving account (which over the past few years have had less than 1% returns) you are actually losing money on your money over time. The only way to truly beat inflation over the long haul is to invest your money. For me personally I only keep 3 months of living expenses in a high interest Ally savings account because my job is secure and I put the rest in the market and let it work for me over time.

Bill advocates looking at your portfolio once (maybe twice) a year and rebalancing to match your desired asset allocation (stock/bond mix). Personally because I use Mint.com and other personal finance apps I see the performance of my portfolio at least weekly, but make sure not to touch the principle of my investment unless I am re-balancing to my desired allocation.

Key Data

• “42 percent of millionaires in the United States make less than one transaction per year in their investment portfolios” (page 7)
• “The stock market average consistently outperforms 75-85% of all managed mutual funds” (page 57)
• “From 1978 to 2007, a $10,000 investment in the stock market average would have grown, with dividends reinvested, to $386,140.” (page 76)

Conclusion:

There are no big secrets in this book, but the common sense investing approach is in line with the Millennial Money philosophy of letting your money do the work of building wealth while you are out living an insanely awesome life. While the overall approach highlighted in The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On with Your Lifemight be too conservative for most Millennials until they reach the age of 40+, this is definitely worth the read for the new investor who is looking for a common sense low-cost investing approach (with the data to back it up).

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