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. [...]