Sustainable Personal Finance

Hi everybody, my name is Nelson and I have a problem.

HI NELSON.

Uh, hi. My problem, upon first glance, isn’t so bad. I abstain from alcohol, don’t do any drugs, and no animals were harmed in the writing of this blog post. Outside of a ticket I once got for a burnt out taillight, I’ve never been in trouble with the law. I always strived to be the kind of guy the girl would actually bring home to meet her parents. I’m respected in the community and I’m relatively sure each of my former bosses would give me a good review.

There’s just one problem. I’m addicted to picking individual stocks.

You know how certain activities are appealing because they’re chasing a perfection you’ll never achieve? Some people get that while golfing, or taking pictures, or even playing a hard video game. I get that while poring over income statements and balance sheets. There are so many choices. I must find the best one.

I’m lucky enough that I managed to snag a position where I’m able to do that for a living. I take the information that I find buried in the back of financial reports and decode it for regular folks, filtering out all the unneeded information. Take it from the guy who has read hundreds of financial statements — there’s a lot of filler.

Because I spend a lot of intimate time with the inner workings of company related finance, I’m pretty comfortable with it. This is after thousands of hours of practice, starting off with watching the business channel while in high school, reading countless books as an adult, and spending some time talking to really smart people.

I don’t say this to brag. In fact, I’m a pretty humble investor. Because even though I spend at least 40 hours per week immersed in this kind of stuff, there’s still a really easy way for you to beat the pants off my portfolio, at least in 2014.

All you needed to do was buy the S&P 500 index fund. In Canada, an investor can do that by buying the index fund under the ticker symbol XSP.

If you would have bought $10,000 worth of XSP on January 2nd, 2014, reinvested your dividends, and then sold out on December 31st, you’d be up to exactly $11,500. You would have got that result by doing no more work than reading this blog post, clicking a few times to your online broker, and putting in an order. It would have taken all of five minutes.

Meanwhile, I spent 40 hours per week times 50 weeks hunched over a computer screen learning more about investing. Sure, I enjoyed most of those minutes, but I still only made about 13% on my money.

If we both had $10,000 to invest, the difference is striking. It would have taken the index investor about ten minutes of work and $20 to establish a position in XSP, consisting of $10 to buy it in the first place and $10 in management fees charged by the fund.

Meanwhile, I spent 2,000 hours of my life immersed in stocks. That’s a gross miscalculation — after all, I was paid for most of those hours — so let’s assume I spent a much more reasonable period of 1 hour per week on my portfolio. That works out to 52 hours per year.

Based on the $10 in management fees I saved myself by picking my own stocks (remember, I still pay commission to buy), I got paid a whole 19.2¢ per hour for my time. And to top it off, I didn’t even make as much as the passive investor did.

If you had the ability to outsource tasks for 19¢ per hour, would you? I suspect you would, even the ones you liked. The only way it makes any sense at all for me to pick my own stocks is if my portfolio is much larger than $10,000, or I get some sort of pleasure from the activity.

I’m relatively lucky. In my years as an investor, I’ve done better than the stock market, partially because all my assets aren’t in equities. Even though I live and breathe this stuff, it’s a constant struggle for me to stay ahead of passive indexers. If it’s hard for the guy who spends his days immersed in stocks and investments to beat a passive approach, what chance do people who spend an hour a week on their portfolio have?

I think they’re hooped before they even start. Which is why they shouldn’t bother. A simple, passively managed portfolio is the way to go for 90% of investors. Chances are, you’re one of the majority. Stop trying to pick individual stocks and go passive. You’ll thank me later.