15 Value-Added Individual Investor Activities

Before estimating the investment value that you might add or take away from your portfolio, you first need to determine whether your strategies are or are not likely to lead to optimal risk-adjusted investment returns.

This value estimation is separate from any hourly opportunity cost related to spending time on your investments versus an alternative use of your valuable time. When you combine an estimate of your value-added or value-diminishing investment contribution with the opportunity cost of your time commitment, you derive an estimate of your total investment wage or opportunity cost. For more on this topic, click here >>  Calculating your investment wage and the opportunity cost of your time
Even if an individual investor feels a substantial amount of confusion about investing, he or she usually holds on to the hope that spending more time will increase investment returns.

This is only true if the strategies implemented actually add investment value rather than diminish portfolio value. Value generating strategies can positively offset the opportunity cost of the time you spend. If not, more time spent on poor strategies will just increase your shortfall.
To be value generating, individual investor activities must increase returns, lower costs, reduce taxes, and/or reduce risk. The 15 activities below are more likely to do this for you.

These 15 guidelines summarize personal financial planning and investment management practices that are more likely to benefit you and your family in the long run.

    Spend much more of your time on managing your career and controlling your living expenses. These are the two most powerful levers that any individual controls related to the success of an investment program. The most successful investment programs always involve continuing additions from savings. (Click here >> Step 2 - Set your personal savings, earned income, and other financial goals)
    Become fully diversified (yes, FULLY diversified ALWAYS) by owning the very broad market in your portfolio (Click here >> Why is diversification valuable to individual investors?)
    Drive out all forms of investment activity designed to beat the market. Target a market return and be very happy if you get close to it. Most individual investors fall well short of earning a market return, because they chase past performance that does not repeat, and they pay much higher investment costs as they chase the mirage of superior investment performance. (Click here >> Can you really beat the securities markets?)
    Learn about and adopt optimal risk-adjusted investment strategies. Understand the risks that financial markets tend to reward and those risks that you can take without any likely reward. (Click here >> Investment securities markets do not pay you for the risks of holding individual common stocks and bonds)
    Use rational investment selection criteria that have been validated by the scientific investment literature. Use only these criteria to pick your investments (Click here >> Rational selection of bond mutual funds and equity mutual funds -- overview)
    Look for efficient, long-term investment vehicles, buy them, and hold them. Save your time and money. Stop all this short-term flopping around.
    Track your investment progress periodically, but do not chase performance. Superior past performance is overwhelmingly due to luck rather than skill, and in practice, it is impossible to detect before the fact the tiny minority of professional managers with true skill from among the vast majority who will just be lucky and not so lucky. (Click here >> The illusion of superior professional investment manager performance)
    Understand the incredibly high price to you of excessive investment costs and buy the lowest cost investments through the lowest cost channel consistent with your strategy (Click here >> Step 7 - Reduce investment expenses and control investment taxation)
    Be conscious, rational, and pro-active about taxes related to your investments. Taxes should never be ignored, but at the same time, they should NEVER be the dominant consideration in any investment decision.
    Understand your tolerance for risk in comparison to other investors and make sure that your portfolio asset allocation properly reflects your relative risk tolerance. Avoid being overly conservative or overly aggressive relative to your risk comfort zone. Errors either way are potentially very costly. (Click here >> Step 3 - Assess your personal investment return and risk tolerance preferences)
    Stop twiddling with things, and adhere to your passive strategy. Let it run. Go do something else that is more rewarding financially and/or more emotionally and spiritually fulfilling. Do not listen to people who tell you to twiddle, especially if they are industry professionals who will make money from you, when they do the twiddling for you. (Click here >> Does it matter how financial planners and investment advisors are paid?)
    Develop an understanding of the things that investors tend to do wrong, and monitor yourself so that you do not do the same things.
    Find advisers who will truly put your interests first and who will give you full attention and comprehensive and reasoned advice. Advisers should more than pay for themselves, but many times they are actually a net cost to you. Managing your advisers is the ONLY place in investing where you really should be active rather than passive. (Click here >> Fee-only compensation aligns the interests of clients and their financial advisors)
    Shop around for advisors and be a critical, cost-conscious consumer. If you do not do some independent checking and critical thinking and just follow a friend’s advice about whom to use as an adviser, then you may simply be just as wrong as your friend is. Just because you like and advisor's personality and feel that you can trust an advisor, this does not mean that you are getting enough value to justify his or her cost. Advisers are expensive. Pay attention to their "value to cost" ratio. (Click here >> Step10 - Choose objective and competent investment advisers)
    Understand insurable risks and economical ways to reduce them. Being focused only on investment risk can leave you unnecessarily exposed in other risk areas that could wreck your financial plans. (Click here >> Step 8 - Insure against financial risks economically)

This list of value-added investment factors is not exhaustive. It also does not attempt to list the myriad of things that investors should not do.

For more ideas from The Skilled Investor about what to do and not do, you may wish to Click Here to consult our Financial Articles Index and read more.

In summary, if you have a reasonable sense that you truly understand investing and have kept accurate performance records to verify your prowess versus the appropriate market benchmarks, then you may actually be adding value by spending time on investing. If not or if your practices are contrary to the strategies listed above, then the more time you spend with your investments, the more likely you are to come up short -- very short.

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Passive Personal Investment Strategies are More Time Efficient with Better Returns and Risk Control

The scientific investment literature indicates that passive investment strategies usually are more time efficient, while they also increase returns and add more value to your investment portfolio.

For example, given the diversification imperative, it is highly questionable whether the vast majority of individual investors should own any common stocks or bonds directly. Instead, they can achieve similar expected returns with less time, lower risk, lower cost, and low taxes by owning passively managed index mutual funds or exchange-traded funds.

Most individual investors should not try to mimic the activities of professional portfolio managers of mutual funds and ETFs. Most investors do this quite poorly. They should not try to track and make decisions on a myriad of details about dozens or hundreds of firms. See: What is the cost to individual investors of sub-optimal portfolio diversification?
Improved time efficiency is a side benefit of choosing a broadly diversified, market investment strategy that you implemented through low cost index mutual funds and ETFs.

Index mutual funds and exchange-traded funds require far less personal attention. Selecting and tracking a portfolio of individual equity and fixed income securities is a task that can be more profitably delegated to professionally managed funds. If you chose broadly diversified, cost and tax efficient funds, you can let career professionals do more efficiently, what you pay them to do full-time.

In a similar vein, the scientific investment literature strongly favors strategies that tend to be passive rather than active in nature. Once an investor puts an optimal strategy in place, better results tend to accrue from leaving things alone rather than constantly twiddling with them and driving up costs and taxes. Being active tends to reduce gross returns through tactical errors and higher trading costs. Obviously, being active also takes far more time, as you try to second-guess the markets and other smart investors. This activity has an opportunity cost. The time you spend on investing takes valuable time away from other activities that you might prefer to do.
Monitoring and adjusting your financial plan requires a periodic commitment of your time, but that commitment need not be excessive.

If you choose optimal investment strategies, properly automate financial tracking with computer tools, and set up periodic, automated investing to the degree possible, then spending more time on personal investing becomes a choice and not a necessity.

Despite the great importance of having a personal financial plan and an optimal investment strategy, people have lives to live, work to attend to, and family and friends to love and play with. Financial and investment planning should not impose an excessive time burden, and the personal time expended should be cost-effectively applied. Unless financial planning and investing is an enjoyable hobby, which it is to some, there is a significant personal cost to spending time on investing. It is important to calculate your “investment wage” for the time spent on investment management and to ensure that this wage remains high. See: Calculating your investment wage and the opportunity cost of your time.

Time in life is the most precious and perishable asset anyone has, and it ought to be spent wisely, efficiently, and enjoyably. Scientific strategies combined with relatively efficient financial markets allow people to minimize their time commitments. The can obtain optimal, near-market, risk-adjusted returns after low cost and low taxes are taken into account. See: Passive individual investors are “free riders” who benefit from the higher costs of active traders.

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The Value and Opportunity Cost of Your Personal Investment Management Time

Your time is valuable, and it should be included in calculations about your investment returns.

Whether you add or subtract value from your assets when you spend time on investment activities should also be evaluated. Some investors spend significant time on the wrong strategies. Instead of adding value, their efforts reduce their investment portfolio performance and degrade their financial welfare.

The personal process of financial planning and investing is life long, and is not just a one-time exercise. Personal situations and financial requirements change, as do the economy and the financial markets. Investment plans need to evolve periodically to remain current and appropriate.
When pursuing optimal investment strategies and controlling costs and taxes, you also need to establish a time-efficient system to monitor, adjust, and adhere to your plan.

This article introduces the concepts of an opportunity cost for your time and a value-added or value-diminishing wage for the time you spend on investment activities. It also discusses two other ideas: that more time spent on poor strategies will just cost you more and that scientifically grounded investment strategies tend to take less time to implement.

Other articles in this Personal Efficiency category will develop these ideas in more detail. You will also find a list of these additional personal efficiency articles at the bottom of this page.
The scientific investment literature indicates that many of the activities that individual investors engage in do not produce superior results.

Very often, they have the opposite effect – especially after costs and taxes are considered. Only a relatively small subset of investment activities tends to produce positive value. Valuable strategies tend to be passive and not active, and they usually focus on reducing costs and taxes rather than attempting to beat the market.
When estimating the net contribution that you might make when you spend time on investing, you first need to estimate whether or not your decisions actually add value to your investments.

Because most individuals probably are not adding value with current strategies, they need to change their approaches. When you honestly evaluate your positive or negative value contribution and track your hours, you can calculate your positive or negative value contribution on an annual and hourly basis. The size of your portfolio also influences the size of your positive or negative hourly investment activity wage.
Next, you can calculate your hourly opportunity cost, which quantifies the value of spending your personal investment time on alternative income generating or leisure activities.

By combining your hourly investment value contribution with your hourly opportunity cost, you can estimate the overall value of your personal contribution to your investment affairs. Usually this annual or hourly figure will be negative for an investor.

Finally, to estimate your overall investment efficiency, your personal value contribution and opportunity cost should be added to all the excess industry investment costs and unnecessary taxes that you incur.

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Calculating Your Personal Investment Management Wage and the Opportunity Cost of Your Time

Your personal investment management contribution is the total value that you add to your investment portfolio less the opportunity cost of your time.

When divided by the hours you spend, you can estimate an hourly wage for your personal investment management contribution. Obviously, the objective is to have a high investment wage. Unfortunately, for most people their wage is likely to be negative. The more time they spend, the more they lose, because they do poorly with their strategies and/or they could be doing something else of greater value with their time.
Many people lose money on their investments due to poor strategy and tactics. Moreover, they pay an additional opportunity cost, because they could be doing something more productive with their time.

To determine your investment wage and the opportunity cost of your time, you need first to determine whether you are generating or losing value for the time that you spend. Concerning any value that you may or may not generate, see the article: Value-added and value-diminishing investor activities.

Estimating whether an investor generates positive or negative value for his time is the trickiest part of the calculation. The investor needs 1) to be knowledgeable about optimal investment strategies, 2) to track and benchmark his risk-adjusted performance carefully, and 3) to be rational and honestly self-critical in his self-evaluation. This can be challenging. Individual investors are confused about optimal strategies and usually are not careful about tracking and calculating their risk-adjusted performance against market benchmarks. In addition, rational self-evaluation is always challenging for people – although investing is one realm where it really pays well to be honest with yourself.

Nevertheless, for the motivated investor who wants to be more productive with his investing, he can do a reasonable "ballpark" estimate of his likely hourly investment wage. Here are some ideas about how to make this estimate.
For purposes of illustration in this discussion, we will assume two cases: one where the investor makes a positive value contribution and one where he does not generate value through his efforts.

Assume that the investor spends about two hours a week or 100 hours per year on research, decisions, and actions about his investments. This many hours is probably higher than necessary, and it might indicate some level of unnecessary investment activism. Let us also assume that he has either a $100,000 portfolio or a $1 million dollar investment portfolio. This helps us to understand if his asset base is sufficiently large to make it worth spending time.

A value generating investor would tend to hold passive market index investments in mutual funds and ETFs. He would avoid trying to beat the market. Instead, he would spend most of his time tracking and correcting investment inefficiencies, looking for low cost investments, and minimizing taxes. Overall, his total annual industry costs would typically be in the range of .25% to .5% of assets.
In comparison, investors that are more typical usually have total annual visible and hidden investment costs that range between 1.5% of assets to 5% or even more of assets.

Where their costs fall within this wide range depends upon their strategies, the channels through which they acquire investments, and how much they pay advisors who have custody of their assets. Average total visible and hidden investment costs are probably about 2.5% annually for the average investor. See: Excessive investment costs are a huge problem for individual investors.

Compared to the average investor with 2.5% total annual investment expenses, this value generating investor improves his net return on assets by about 2% each year. He would generate $2,000 more a year on a $100,000 portfolio. Because he spends 100 hours, his hourly investment wage would be $20/hour. On a $1 million portfolio, this wage would be $200/hour.
The other amateur investor is much more active, favors hot individual securities over funds, and spends his 100 hours trying to pick stocks to beat the market.

He does not focus on cost savings or tax reduction and trades frequently because of media stories, tips, and rumors. On average, the prognosis for this approach is not positive. Data from a study performed by Professors Kumar and Goetzmann indicates that self-directed individual investors using discount brokerage accounts probably lose about 2.5% per year due to lack of diversification and active investment mistakes. This figure does not include tax inefficiencies. See: What is the cost to individual investors of sub-optimal portfolio diversification?  Costs of investors buying individual stocks and bonds through “full service” retail brokers are probably significantly higher due to higher trading costs and custody charges.
The outcomes of active strategies are highly variable with a range that is far wider than for those who adopt a passive index strategy.

Of course, that is the siren song of active strategies. Those who pursue them always hope to come out on top, when in reality, most will trail the market return even before costs and taxes are considered. See: Can a limited number of stocks provide complete portfolio diversification?

Given this active investor’s approach, we will assume that his total visible and hidden costs and unnecessary taxes are 3.5% annually. Compared to average investor’s costs of 2.5%, he would lose 1% or $1,000 per year on a $100,000 portfolio. Therefore, compared to the average investor, his hourly value-diminishing wage is a negative $10/hour. On a million dollar portfolio, the hourly value-diminishing wage would be negative $100/hour.
Instead of contrasting the costs of each of these investors with the 2.5% annual costs of an average investor, we can instead compare these two investors directly.

With the assumptions above, if this rather active investor were to adopt the low cost, low tax, passive market strategy of the other investor, he could potentially reduce his expenses by 3% or $3,000 annually on a $100,000 portfolio. His hourly value-added wage would be $30/hour compared to his previous active strategy. With a $1 million portfolio, his value-added wage would be $300/hour.

Next, we need to place a value on the opportunity cost of the personal time of these investors. Whether or not his value-added investment wage was positive or negative, his time also may have an alternative value. How should this individual investor value his time? The net hourly wage from his compensated work provides a reference point. If the investor makes $100,000 per year, this would translate into about a $50/hour gross wage, or about $32.50/hour net with an assumed 35% combined federal and state marginal income tax rate.
If the investor has the opportunity to make more money by working more hours, then it would be appropriate to use his full hourly net earned income wage to value any time he spends on investment portfolio self-management.

Instead of spending time on investing, he could earn more money to invest. For this example, the annual net opportunity cost on 100 hours would be negative $3,250 per year. This investor would need a large portfolio and quite superior performance to offset this labor opportunity cost. For an investor with the opportunity to earn more income, the relative ease of selecting and holding mutual funds or ETFs should be a very appealing alternative because of the much lower time commitment.

Conversely, the investor who absolutely loves studying businesses, industries, companies, and securities analysis and who would have no other hobby might wish to apply a much lower or even zero opportunity cost for his labor.

However, The Skilled Investor suspects that the average individual investor would have an opportunity cost that is closer to his personal net earned income wage. Becoming skilled and efficient at investing is important to many people, but it does not rank high among the alternative pleasures and preferred hobbies of most people.
Combining the hourly value-added wage with the hourly labor opportunity cost, allows us to estimate what the total benefit or cost of an investor’s effort might be.

Compared to the 2.5% annual costs of the average investor, the cost efficient investor with a $100,000 portfolio had an investment value-added wage of $20/hour and an opportunity cost of $32.50/hour. His net self-investment wage is negative $12.50/hour. His portfolio is too small for his investment skill to outweigh his labor cost.

Nevertheless, his effort to optimize his investments is only modestly costly, but certainly is very worthwhile compared to the much greater costs of an average or high cost investor. If his portfolio were $1 million dollars, then his total self-investment wage would be $167.50/hour. (A $200/hour value-added investment wage minus the $32.50/hour opportunity cost.) Obviously, if assets are managed well, then the more assets the better.
Regarding the more active, but inefficient investor, his strategy is both investment value and labor opportunity cost inefficient.

Compared to the 2.5% costs of the average investor, on a $100,000 portfolio, his value-added wage is negative $10/hour and his net earned income opportunity cost wage is negative $32.50/hour. The total is a negative $42.50/hour. We assume that he is active, because he is trying to make more money. However, he might prefer to do something else with his time, if he realized that his efforts were really diminishing his assets.

If this investor had a $1 million portfolio, then his total self-investment wage would be negative $132.50/hour. (Negative $100/hour in investment value minus his $32.50/hour opportunity cost.) The greater this investor’s assets the less valuable it is for him to manage them with a poor strategy. The more time he spends, the worse it gets.

To summarize, if this active and inefficient investor switched completely over to a passive cost conscious strategy, his total hourly wage could be a more tolerable negative $2.50/hour on a $100,000 portfolio. (A $30 hourly value contribution less a $32.50 hourly opportunity cost.) On a $1 million portfolio, his total investment wage could be a positive $267.50/hour. (A $300 hourly value contribution less a $32.50 hourly opportunity cost.) He is handsomely rewarded for being more efficient, especially when his assets are greater. 

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