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Coffeehouse Incvestor Portfolio

Coffeehouse Investor Portfolio

Coffeehouse Investor Portfolio. Last week I wrote about a retirement portfolio investment strategy called core and satellite portfolio. This style is also known as core and explore, barbell, or core plus. This week I want to stay on the same theme and talk about the Coffeehouse Investor portfolio. This source of this strategy is the book “The Coffeehouse Investor’s Ground Rules: Save, Invest and Plan for a Life of Wealth and Happiness” by Bill Schultheis that was published about 23 years ago in 1998. 

The author was an early proponent of using passive index funds at a time when actively managed funds and star fund managers ruled the roost. The Coffeehouse Investor portfolio strategy is probably not as popular today due to the long bull market in large-cap tech stocks. But the principles and underlying portfolio strategy for retirement plans are still relevant today.

Coffeehouse Incvestor Portfolio
Coffeehouse Investor Portfolio

What is the Coffeehouse Investor Portfolio?

The Coffeehouse Investor portfolio strategy focuses on using passive index funds, uncorrelated asset classes, diversification, capturing as much of the market’s return that you can, and saving. These are all sound principles and many of us know this today. That being said, the actual portfolio asset class breakdown in the Coffeehouse Investor strategy maybe too conservative for investors, especially younger ones. But I would argue that it works overtime with relatively low volatility, more on that below.

The actual portfolio is a variation of the 60% equities / 40% bonds portfolio. However, the Coffeehouse Investor portfolio takes the stock allocation and splits it into six different asset classes: a large-cap fund, a large-cap value fund, a small-cap fund, a small-cap value fund, an international stock fund (ex-US), and a real estate investment trust (REIT) fund. The bond asset allocation is simply a total bond index fund. The table below outlines portfolio weightings and asset classes in the Coffeehouse Investor portfolio.

WeightingAsset Class
10%U.S. Large Cap Equities
10%U.S. Large Cap Value
10%U.S. Small Cap
10%U.S. Small Cap Growth
10%International Equities (ex-US)
40%U.S. Total Bond Fund

Pros and Cons of the Coffeehouse Portfolio

The main pros of Coffeehouse Portfolio are that is is simple and easy to follow using an index fund strategy. It is also broadly diversified reducing risk. The Coffeehouse Portfolio also contains REITs, which have performed well for stretches of time.

The cons of the Coffeehouse Portfolio are that some investors may not want to own so many asset classes. IN addition, the bond fund allocation is high for younger investors.

Popularity of the Coffeehouse Investor Portfolio

The main reason for the popularity of the Coffeehouse Investor portfolio at the time was its performance during the dot-com crash from March 2000 to October 2002 compared to the S&P 500 and even a 60% total stock / 40% total bond portfolio.

The table and chart below compare the returns and volatility of the Coffeehouse Investor portfolio (portfolio 1 – blue line) versus the 60% total stock / 40% total bond portfolio (portfolio 2 – red line), and 100% U.S. large-cap growth (portfolio 3 – orange line). We assume the portfolios are rebalanced annually. Focus on the compound annual growth rate (CAGR), standard deviation, and max drawdown numbers. It is clear why the Coffeehouse Investor portfolio became popular for many small investors who were probably overexposed to U.S. large cap growth stocks. When the market went down the Coffeehouse Investor portfolio provided some downside protection. Many investors likely viewed the portfolio as safer for retirement plans.

Coffeehouse Investor Portfolio Returns During the Dot-Com Crash (March 2000 – October 2002)

Coffeehouse Investor Portfolio - Dot-Com Crash
Source: Portfolio Visualizer

The Coffeehouse Investor portfolio does not always perform well compared to the 60% total stock / 40% total bond and other portfolios. The recent COVID-19 pandemic bear market severely punished REITs, which would have been a significant headwind for the Coffeehouse Investor portfolio.

Coffeehouse Investor Portfolio Returns from January 2000 – June 2021

How does the Coffeehouse Investor portfolio do over longer periods of time assuming a buy and hold strategy in a retirement plan? We ask this question since there are many choices for retirement portfolio strategies. In this comparison we examine the Coffeehouse Investor Portfolio (portfolio 1 – blue line), the 60% total stock / 40% total bond (portfolio 2 – red line), and the 3-fund Boglehead portfolio (portfolio 3 – orange line). We assume the portfolios are rebalanced annually. Again, focus on the compound annual growth rate (CAGR), standard deviation, and max drawdown numbers. It is clear that the Coffeehouse Investor portfolio comes out ahead in this time period.

Coffeehouse Investor Portfolio - Returns and Volatility
Source: Portfolio Visualizer

Final Thoughts on The Coffeehouse Investor Portfolio

Most retirement plans have a mix of passive index funds and active funds. The Coffeehouse Investor Portfolio is one possible strategy assuming that all the asset classes are available as index funds. For retirement portfolios in 401(k) plans or even IRAs it is pretty much a no brainer to use passive index funds. You will capture much of the market return and minimize your costs.


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Chart or Table of the Week

Today I highlight Clorox (CLX). The company is known for its namesake product Clorox bleach and cleaning products. But Clorox also sells many other well-known brands including Kingsford, Burt’s Bees, Glad, Pinesol, Brita, Liquid-Plumr, Hidden Valley, Tilex, Formula 409, and others. Clorox was obviously a major beneficiary of the COVID-19 pandemic. Sales and earnings surged. But rising vaccination rates and reopening of the economy have led to pessimism about Clorox. The stock price is down (-10.2%) year-to-date. The all-time high was nearly $238 per share and the current stock price is ~$179 per share. Clorox is not yet a deal, but investors should keep an eye on this Dividend Aristocrat with 44 years of dividend growth if the yield goes over 3%. The screenshot below is from Stock Rover*.

Chart, bar chart, histogram

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Source: Stock Rover*

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements. I update this list weekly. You can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at end of June. The number of companies on the list has risen to 526. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.

There were three new companies to add to the list this past month. These three companies were DTE Energy (DTE), National Health Investors (NHI), and Gap (GPS).

Market Indices

Dow Jones Industrial Averages (DJIA): 34,788 (+1.03%)

NASDAQ: 14,639 (+1.94%)

S&P 500: 4,352 (+1.67%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 46.2X and the Schiller P/E Ratio is at about 38.2X. These two metrics up down this past week. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I personally view anything over 30X as overvalued based on historical data. Note that we are near or over 40X and valuation levels near the top of the dot-com era.

S&P 500 PE Ratio History

A picture containing text, whiteboard

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Source: multpl.com

Shiller PE Ratio History

Chart, line chart

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Source: multpl.com

Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was down about 0.5 points this past week to 15.07. The long-term average is approximately 19 to 20.

Graphical user interface, application

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Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. The index is now in Fear at a value of 44. This is up 14 points this past week.

There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

Market Momentum is indicating Extreme Greed. The S&P 500 is 7.87% over its 125-day average. This is further above the average than normal over the past 2-years.

Put and Call Options are signaling Extreme Greed. In the last five trading days, put option volume has lagged call option volume by 59.79%. This is amongst the lowest level of put buying in the past two years.

Junk Bond Demand is indicating Greed. Investors are accepting 1.98% yield over investment grade corporate bonds. The spread is down further from recent levels indicating that investors are taking on more risk.

Market Volatility is set at Neutral. The CBOE VIX reading of 15.07 is a neutral reading.

Safe Haven Demand is in Fear. Stocks have outperformed bonds by 2.06% over the past 20 trading days. This is close to the weakest performance for stocks over the past 2-years as investors move back into bonds.

Stock Price Strength is signaling Extreme Fear. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the lower end of its range.

Stock Price Breadth is indicating Extreme Fear as advancing volume is 3.91% more than declining volume on the NYSE. This indicator is near the lower end of its range over the past two years.


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Source: CNN Business

Economic News

The Conference Board’s Consumer Confidence Index increased in June to a pandemic high of 127.3, bettering the upwardly revised 120 May reading. The Present Situation Index, which is based on consumers’ sentiment of current business conditions and the labor market, improved to 157.7, up from 148.7 in May. The proportion of consumers planning to purchase homes, automobiles, and major appliances all rose, vacation intentions also rose. The Expectations Index, which measures consumers’ short-term outlook for income, business, and the job market, increased to 107.0, up from last month’s 100.9 reading. The share of consumers that indicated jobs were plentiful increased to 54.4%, up significantly over May’s 48.5%. The share of consumers who said jobs were hard to get dropped to 10.9%, down from 11.6%. The percentage of consumers who said business conditions are “good” increased to 24.5%, up from 19.9% last month.

The U.S. Bureau of Labor Statistics reported the unemployment rate ticked up slightly in June to 5.9%. However, 850,000 jobs were added easily beating May’s revised total of 583,000. Employment in June was still down by 6.8 million jobs as compared to pre-pandemic levels. Gains were especially strong in leisure and hospitality which added 343,000 jobs, accounting for 40% of June’s increase. Hotels and other accommodations, as well as arts, entertainment, and recreation both added about 75,000 jobs. Retail added 67,000 jobs, with strong growth in clothing and merchandise stores. State and local government education added 230,000 jobs. Modest declines were reported in motor vehicle manufacturing down 12,000 and construction down 7,000. The labor force participation rate remained unchanged at 61.6% in June.

Thanks for reading Coffeehouse Investor Portfolio – Week in Review!

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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