How Much Time is Required for Stock Investing?


Ask SmallIvy

Dear SmallIvy,

I’m interested in stock investing but don’t have a lot of time.  How much time is needed for investing?

Thanks,

Paul

 

Dear Paul,

Many people think that a great deal of time is required for investing.  It is true that some people spend hours each day watching prices and making trades.  Ironically, most of these people will not do as well as the market, and many will actually lose money because what they are doing is more akin to gambling than investing.   In one is investing to make money and not for the entertainment value, what I call “serious investing,” one can do very well while spending very little time.  Here are the ways:

Investing through mutual funds:  The easiest way for people with little time to invest is through mutual funds.  By choosing the right kind of funds and performing some simple steps one can almost match the market, which historically has returned more than inflation, bonds, and money market funds over long periods of time.  The time required for mutual fund investing is as follows:

1.  Initial investment (find a family of funds to use, set up an account, review fund offerings, choose initial funds) 3-10 hours.  Note that Vanguard offers an excellent selection of funds that have low costs (probably the most important characteristic).  Simply dividing money between the S&P 500, Mid Cap and Small Cap index funds would not be a bad start.

2.  Monitoring (reading statements, checking progress) 2-5 hours/year.  Really just glance at statements once in a while when they come in and maybe read a prospectus once a year to make sure the funds are still doing the things that they did when you invested in them.  For example if your large cap stock fund decided to start investing heavily in bonds, you might want to change out.  Otherwise, leaving things alone is best.  This also helps you resist the temptation to try to trade funds to time the market.  Selling a fund just because it performed badly over the last year may be the worst thing to do, because it may now be low in price and ready to make up some ground.  Likewise, buy a fund that has done well and you may be purchasing a set of stocks that are overpriced and ready to decline in value.

3.  Rebalance (reallocate money among the stocks you own) 2 hours/year.  It is a good idea to rebalance your portfolio about once a year (pick a date like the day daylight savings time begins or your birthday to remember).  To do this, have a target percentage of your money for each fund (for example, you might want to have:

 Large Cap Fund – 20%, Mid Cap Fund – 40%, Small Cap Fund – 40%.

If after a year the distribution was 40% large cap, 60% mid cap, and 10% small cap, one should sell some of the large cap and mid cap funds and put the money into the small cap fund to bring the percentages back to 20/40/40.  In doing this you are selling the funds that have done well, and therefore are high in price, and buying the funds that have done poorly or not as well, therefore are lower in price.  Many mutual fund companies have a way to do this efficiently through their websites.  Note however that in doing so you may be generating capital gains that will be taxed, so it may be wise not to move cash unless the difference between the percentages and your targets is fairly large (or the funds are in an IRA which will not be taxed when the funds are moved).

Investing in Stocks Directly:  Investing directly takes a bit more time but it need not be a lot more time.  Once again if one is constantly moving money around one will just be making money for the brokerage house.

1. Setting up the accounts (finding a broker, funding the account) 2-5 hours.  The main decision here is between a full service brokerage, which will charge more but offer more assistance, and a discount broker who will charge little but offer few service and advice.

2.  Finding stocks (developing a list of stocks for investing) 5-10 hours/year.  For serious investing we are looking for stocks that will do well over the long-term.  The best method is to develop a list of stocks with these characteristics and then use this list each time cash is available to purchase more shares.  This will require a few hours a couple of times each year looking through Value Line or other sources of data.  Because the stocks we’re seeking are long-term investments in businesses that grow consistently it isn’t necessary to reevaluate them often.

3.  Purchasing shares (putting in orders, verifying trades)   5 hours/year.  Once the stocks are chosen it is simply a matter of selecting the one on the list that is at the best price when one has money to invest.

 4.  Rebalancing 5 hours/year.  Just as with mutual funds it is good to sell some shares of stocks that have gone up considerably as well as sell out of stocks that turn out to be bad investments.  A good rule for stocks that advance is to sell some shares and spread them out into other stocks if the value of the position becomes so big that you would not want to lose the whole position (since you could).  If a stock declines in value or simply sits there, you should reevaluate the fundamentals.  If it is not a stock you would buy again it is best to take the loss and use it to offset some of your gains on taxes.

5.  Monitoring (tracking progress) 12 hours per year.  It is probably best to not spend more time than simply reading over your account statement once per month and reading through the annual reports when they come out.  If more time is spent it is likely that one will be tempted to trade often, which will cause expenses, capital gains taxes, and may result in missing out in big moves upwards.

Whether investing in mutual funds or stocks directly, a huge time committment is not really needed.  In fact, spending less time is probably better than spending more.

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment for this blog.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Comments appreciated! What are your thoughts? Questions?

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