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.

Related Personal Financial Planning Posts

• How Investment Sales Loads and One Time Investment Fees Work ( Understanding one-time investment fees, such as sales loads Sales load charges and commissions on investment purchases differ from the financial service industry's numerous other recurring methods of charging fees to their retail consumers. Sales loads are less straightforward to analyze for investment lifetime cost-effectiveness, compared to annually recurring charges. (See: Pay less to get more) If you have [...])
• Be Wary of New Investment Asset Classes ( Hear ye, Hear Ye, individual investors: Be wary of new investment asset classes - A Tip from The Skilled Investor Many promoters in the financial services industry have shown a strong proclivity in recent years to invent and to market supposedly "new" investment asset classes. Industry advocates will claim that these new asset classes deserve some [...])
• The New Blog Carnival of Financial Planning ( Introducing the Carnival of Financial Planning We spend an extraordinary amount of time earning money and a lot of personal time on backward looking tax and accounting matters. When these tasks are done, how much time and energy do you have left for forward-looking financial planning activities that could improve your future financial welfare? Most people [...])
• Nationwide S&P 500 Index Fund - Class A Shares (GRMAX) fetch a +2 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
• Your Investment Risk Tolerance Drives Your Asset Allocation Decision ( Your personal tolerance for investment risk should drive your asset allocation decision - A Tip from The Skilled Investor Your tolerance for investment risk is a relative thing. Few people like investment risk, but some can handle it better than others do. The more investment risk you can and are willing to tolerate, the higher your [...])
• How to Lie with Statistics - Investment Performance Charts ( How to lie with statistics: Investment performance charts - A Tip from The Skilled Investor Darrell Huff wrote a short and very informative book, "How to Lie with Statistics," which was first published in 1954 and was amusingly illustrated by Irving Geis. This book is still in print and remains very popular (Amazon book rank #2,040 [...])
• Commodity Futures in Your Investment Portfolio ( Commodity futures in your investment portfolio - Is there really any future for individual investors? The Skilled Investor's previous article, "Be wary of the new investment asset classes," voiced skepticism about many supposedly new asset classes. This article delves into the financial science behind this skepticism, as it relates to one of these supposedly new asset [...])
• Risk-Free Investment Money Is Fantasy Money ( For Individual Investors Risk-Free Investment Money Is Fantasy Money Securities with low investment risk and high investment returns are just fantasies. No "risk-free" investment money is consistently and reliably available to individuals. Luck dominates skill in the securities markets. Clever investment selection is vastly over-hyped, and only the promoters tend to benefit. On average over long periods, [...])