People who prefer not thinking about their investments ever again even when their investment income becomes comparable to their wage income are probably well off joining everybody else in a low cost index fund. If the index tanks for years on end — think Nikkei, the Japanese stock market index, which after an impressive “new eraish run” has gone nowhere for the past 20 years despite their central bank running decade long low interest rates — at least index investors will be tanking together with a lot of other people. Doing what many other people do is rarely a bad idea. Just look what happened to the subprime borrowers who got in trouble. They got a political rescue. Democracy means strength in numbers.

However, people with 6+ figure portfolio/savings might want to work a little harder. Suppose spending 100 hours on market research a year yields an increased return of investment of 1%. Now with a $10000 portfolio, that is $100 or $1/hour. Unless market research is considered to be a hobby that is not worth it compared to taking a second job as a burger flipper or filling out surveys. However, with a $100000 portfolio, 1% is $1000 or $10/hour. The point here is that the larger the portfolio, the larger the return on time spent.

The next step up from savings accounts, CDs and index funds are managed mutual funds. Now most managed funds underperform the market. One reason is that they grow so large that they essentially become the market while still charging 1% fees that are much higher than index fees. On the other hand, some funds consistently outperform the indices and have a long track record of doing so. In general, the market is such that every flavor of investing will become trendy at some point (right now it’s index funds for “the people” and hedge funds for “the ballers”). In my opinion it is more important to pick a fund based on whether you agree with the manager/company’s investment values than based on whatever short term returns they have demonstrated. The worst thing is to switch investment styles and try to follow trends. If, on the other hand, you stick with one philosophy you will make money if that philosophy becomes popular. Agreeing with the fund manager’s values also makes it a lot easier emotionally speaking to stick with it even if year over year returns are negative. Personally I like value based and econometric funds, such as Oakmark, Hussman, Clipper, Fairholme, Permanent Portfolio Family, FPA, and Icon Funds, but that’s just me. Figuring out who “you” are and who “they” are is what 100 hours a year are for.

The next step up from buying managed mutual funds is buying single stocks and the occasional closed-end fund. I would consider this step when you’re past $20000 (but $100000 is better) in liquid assets and you can put in a $10000 order and watch it drop $500 within an hour without passing out. This is the step where you take complete responsibility of your investments and it is the step I’m currently working at. The effort needed here is on the order of 10-15 hours a week. Most of this is due to me having a background in hard science rather than business. I actually working towards heavy duty finance degree to get a solid investment background partially because it would make me a more knowledgeable individual investor but also because it would allow for a career change with new opportunities. I’m not telling you what it is, but I’ll give you a hint: It’s a rather respectable three letter acronym. The trick here is of course not only in knowing what your investment philosophy is but also how to apply it e.g. which individual shares would represent your philosophy. When buying single shares, annual fees and commissions can drop almost to zero as some companies would be held for years for free.

I’m not sure what the next step is. I suppose if you can easily spare $50000 of your investment income e.g. your net worth is counted in the millions, the thing to do would be to hire a wealth manager and spend your time on the beach. Personally I don’t plan on getting that rich. Doing so would require that I keep working until I’m 60 or so.

Originally posted 2007-12-20 15:08:00.