We all know the value of time when investing. Time in the markets, not timing the market. But what about the cost of time. Or more so, the time that we have available to us to think about how we are investing.
None of us have any time any more, everyone is time poor.
In the graph above, I’m suggesting a version of real return on investing that includes the cost of time to earn that return. This is looking at it on a dollar per hour basis.
To demonstrate my thinking further, let’s say an investment portfolio grew by $12,000 after fees and tax last year.
Then a little calculating:
- Work out how many hours spent a week looking at investing opportunities, checking facts, counting dividends etc.
- Multiply by 52 weeks
- Determine an hourly rate in dollars that you would work for to earn a wage.
Let’s say for arguments sake this is $10 (hourly rate) X 52 (weeks) X 6 (hours per week) = $3,120.
Now subtract this total off the total return of an investments portfolio for the last 52 weeks.
In the above scenario, realistically $8,880 (the real return) was made after taking out the time to make it. The return was not all for free, you had to put in what you got out.
Essentially, the real return has almost shrunk by a quarter. And that is excluding inflation…
It hurts if you need to spend that much time nurturing it relative to the return.
Keep track of time and measure
This is extremely important. Forget about the dollar value mentioned above for a moment and consider the following.
To spend 300 hours in 2015 on maintaining investments, then doing the same in 2016, then one would expect to make a higher percentage return the following year. This can’t always be done, it is not in the investor’s control. So there has to be some sort of improvement or efficiency gain.
We all know it pays to spend time learning how to get better. Theoretically, if you are getting less than 10% return year after year, I think you should be putting in less time to get the same return. I think to myself, how can I do this more efficiently with time without cutting corners. Is it possible?
I think the answer is to take action and be smart about it. Spend the time reading the investing books, not listening to the media. Be smart about time and get better.
Here are seven random activities I have ditched to save time:
- Checking for dividends
- Measuring weekly performance
- Measuring monthly performance
- Checking stock prices
- Looking at price graphs
- Taking direction from the media
- Buying stocks that I needed to sell a couple of months later
Index funds – A time saver?
This is how index funds/passive investing could win out – low time involvement.
Getting market returns for just making an initial investment on the S&P500 for example and spend the 300 odd hours mentioned above doing anything else.
If I had my way, one day if I am lucky I might spend 300 hours a year playing golf!
It’s not just the low fees, the time element is critical for the DIY investor. The talk of index funds is all about low cost but there is a huge saving of the cost of time there as well.
Legendary investor Warren Buffet harps on about index funds and that every amateur investors should stick to these and never pick stocks. I read a book recently called ‘The Gone Fishin Portfolio’ by Alexander Green that goes into great depth on how to create a portfolio full of index funds and how it should be rebalanced. Anyone interested in investing index funds should read a copy to get some insight into this.
A huge time waster: Investing re-work
In the past where I have second guessed myself a lot and was learning the ropes, the cost of time has blown out. Who knows how much time it was? Being young and dumb might seem like you have that luxury, but the truth is you don’t.
Past example of a time-wasting thought: should I sell this stock because it is down 10%? This always got amplified if the stock price kept falling and then I would start looking for articles on-line on analysis and try to validate that my decision was correct. In my opinion now, stop losses on trades are a complete waste of time and money. Go with the decision you made. A stop loss trade is a sign that you are not sure about the investment you have purchased.
During the global financial crisis, I spent so much time figuring out what to do next that in hindsight, the best thing to do was probably nothing. I should have been playing more golf… Or gone fishing, just like the book ‘The Gone Fishin Portfolio’ suggests.
It’s probably not a bad thing and helps keep your hands off your portfolio. If I had done that during the GFC, I would have been better.
Use your time wisely
As a DIY shares investor, I try to maintain an investing system where there is minimal time maintenance. There needs to be good justification to invest on your own. You have to be able to beat the market clearly and don’t forget the cost of time to earn the return.
Fair enough when you are starting out. Those first few years are a steep learning curve. In hindsight I could have done this a lot better and spent time more efficiently and would encourage others to do the same. As I said earlier, read the investing books and don’t stop.
I now spend more time learning how to invest further and/or create more passive income and spend less time trying to figure out where markets are heading. This is the best use of my time.
Perhaps the 80/20 rule is a good method? Spend 80% of your time learning to get better and 20% managing your current investment situation. I think that I am probably 95/5 at the moment.
What is the best use of investment time?
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