Financial Planning and Investment Management Personal Efficiency Articles

Calculating your investment wage and the opportunity cost of your time

Your personal investment contribution is the total value that you add less the opportunity cost of your time. When divided by the hours you spend, you can estimate an hourly wage for your personal 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.

The value and opportunity cost of your investment time

Your time is valuable and 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 degrade their financial welfare.

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

The scientific investment literature indicates that value-added investment strategies usually are more time efficient. 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.

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. 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.