How Much Time Should You Be Spending On Investing?
Recently I was doing a presentation for a Canadian MoneySaver shareclub and as the Q&A portion of the presentation progressed, a seemingly harmless question came up. The individual simply asked, “How much time should I be spending on my investments?” My mouth started to open in an attempt to answer but then I paused, quickly coming to the realization that the question was much more complicated than it sounded.
Like most answers with investing, the reply started with “It depends”, and while this can often be a frustrating response to hear, it is one of the most honest answers you will likely come across. Just like how one stock may be a great fit for a young investor with a stable income but make no sense for someone in retirement, how much time an individual should spend on their investments depends on numerous factors.
So what was my response? The appropriate amount of time for one to spend on their portfolio is an amount that allows them to be comfortable with their decisions and get sleep at night while not consuming all of their free time (unless they want it to).
There is a low bar that needs to be met, however, and that is if a minimum amount of time and effort cannot be spent on your investments, seek an advisor who can do the work for you. Admittedly, the answer is a bit vague, so I wanted to dig a bit deeper into how much time is appropriate for an individual to spend on their investments and then split it out into various “factors” that would impact the level of effort an individual would need to apply. It may be worth noting that this only considers a typical buy-and-hold investor and not shorter term “day-traders” because if you trade daily, then it is really more like a full-time job. To make it a bit more technical, we will be applying a point system to each factor that you can add up as you go along to see how much effort your investment process requires. A number in brackets beside each factor will indicate the value (1 for less effort, 2 for more effort).
Passive (1) Or Active (2):
It is no secret that a passive investor who holds a basket of mutual funds or ETFs in a diversified fashion should expect to have a lot less work to do compared with one who is picking stocks or more niche fund exposures. A truly passive investor could argue only checking their portfolio once a year and rebalancing at that time but monthly or quarterly is probably most realistic given that it should only take a few minutes to check on things regardless. An active investor, on the other hand, should have numerous individual positions that need to be checked on.
Value (1) Or Growth/Momentum (2):
Value stocks are appealing for reasons such as the dividend and that they seem like you are getting a deal, so it is no wonder why so many DIY investors love a value strategy. Another reason why it is an attractive approach is because it requires less monitoring. The cheaper a stock is, the less downside risk the holding has. At some point the tangible assets and/or dividend of a company come into play to support a price, and the dissonance of this intrinsic value from the prevailing share price is less for a value stock than it is for a growth stock. This simply means that even if things go wrong, they will go less wrong than other styles. The natural conclusion here is that with less volatility, less time monitoring your investments would be required. This does not mean value stocks are a superior investment, however, as even though there may be less downside risk, a stock that simply does nothing over 5 or 10 years has a very real opportunity cost compared to a growth stock that earns a healthy compounded return. Things just change at a faster pace and require more regular monitoring when holding growth names.
Large/Mega-cap (1) Or Mid/Small-cap (2):
There are two factors at play here. One is that a company’s size acts as a bit of a natural filter for an investor. The larger a company is, the more investors have scrutinized it, the more revenues it has generated and the more of a successful operational history the company (hopefully) has. There are exceptions (such as in the case of outright frauds) but in most cases, it is safe to assume that a $10 billion dollar company exists because it has a solid, sustainable business. An investor shouldn’t have to check in on these names to ensure contracts are being signed and cash flows are rolling in. The other factor is volatility and liquidity. Due to the size, large-caps are more liquid and it takes a greater degree of buying or selling to move a stock. Small-cap stocks, on the other hand, can move 5% any given day on no real news. This could be due to liquidity issues where one larger buyer or seller moves the price, or may simply be due to a stock moving with the market but to a larger degree. While it makes sense to check on these more often to ensure nothing fundamental has changed at a small, developing company, there is a counterintuitive thought to consider here. Investors may actually want to check small-cap stocks less often, as they often swing on immaterial news. Checking it regularly may actually cause an individual to sell out of a great company that makes sense as a long-term investment just because it is “down”.
Company Has Low Debt (1) Or High Debt (2):
In general, the more debt a company holds relative to the industry average, the higher volatility one can expect. Higher debt also means that small problems can turn into very big ones as the company has less financial flexibility to weather any downturns that may be out of the company’s control. So naturally, if a portfolio holds a lot of leveraged names, it would require more monitoring as a single negative event could impact the company’s financial feasibility whereas a company with no debt could continue operating in a tougher environment with no threat of bankruptcy. Pairing this factor with that of company market-cap, it always seems interesting when smaller capitalization stocks are considered high risk. One could argue that a smaller company with no debt and fast growing revenues is far less risky than a large, mature company with loads of debt and revenue growth that matches inflation at best.
High Investment Knowledge (1) Or Low Investment Knowledge (2):
If an individual is comfortable and familiar with investing, understands basic financial principles, has read books on the topic already and has learned over time what works for them, then a little less time should be required to find stocks, rebalance and monitor a portfolio. For those with less investment comfort or knowledge, more time should be given to reading about investing and the stock market. Fortunately, this “effort factor” should actually diminish over time. The longer an individual is a student of the markets, the less time they need to devote to the basic principles and general understanding of how to invest. I would be more inclined to view this factor as an upfront investment as opposed to any cost. Regardless, if you are newer to investing, it is fair to assume that you should spend a bit more time on monitoring your portfolio and doing due diligence than someone who has been investing for 40 years.
So if you tallied up the factors and you’re a “ten”, you should likely be spending more time than the average investor on your portfolio. If you came out to a five, you should be able to enjoy that month-long vacation with no worries. To be clear, one result would not be superior to another: they both have tradeoffs and it is up to you to decide if the level of effort matches what you are looking for in your lifestyle.
What does this all actually work out to in hours? I think the answer is that an investor needs to spend a lot less time monitoring their portfolio than they think. Many jaws may drop at this suggestion, but I think it is fair to say that if you hold a truly diversified portfolio (across size, style, geography and asset class), the most you need to check in on the portfolio would be weekly. If this suggestion makes you uncomfortable when looking at your current holdings, it may be a good indication that you are holding too much risk. With that, aside from a truly passive investor, you would probably not want to go without a portfolio check-in for longer than a month. Depending on the portfolio, an argument could be easily made for even less frequent check-ins but I think the key here is that if you are not willing to spend one to four hours a month on your portfolio, you might be at a stage where you either don’t really enjoy doing it yourself or simply do not have the time to do it and should seek an advisor.
If you think investments need to be monitored daily, you should know that Fidelity has done studies where the best performing portfolios are ones where clients forgot they had an account in the first place! So taking this ad absurdum, one could actually argue that an investor should never monitor a portfolio! Finally, there is a difference between needing to monitor your portfolio and doing it because you enjoy it. If you are an individual who loves the ever-changing, dynamic investment landscape and are always searching out the next best opportunity, then by all means, spend all the time you want on the process as it can be very fulfilling (even if sometimes frustrating). However, if you are an individual who dreads logging into the account and just can’t find the time to sort out your financial needs, it could be a sign that this is something best left to a professional. As I said earlier, it depends!
Ryan Modesto, CFA, is Managing Partner at 5i Research Inc. in Kitchener, Ontario. He can be reached at ryanmodesto@5iresearch.ca