12-04-2021, 05:36 AM
How Much Does Your Portfolio Need To Be To Make It Worthwhile As A Stockpicker?
<!-- SC_OFF --><div class="md"><p>Fellow investors,</p> <p>I am out of new investing idea, so for this post I'd like to discuss something that is often ignored: How much money do you need to have in your portfolio to make it worth your while as an individual-stock picker? Central to this question is the opportunity cost that all stock pickers go up against: the almighty index funds!!</p> <p>Simple enough, your performance over the long run needs to be judged against a broad-market index fund, for which you incur no sweat and no effort holding.</p> <p><strong>Assumptions</strong> (these are meant to simplify the calculation of opportunity cost):</p> <ol> <li><strong>You derive no net intrinsic benefit from your action of picking stocks</strong> (so no net emotional rewards, no net benefit in learning and gaining experience as a stock picker, no pain or suffering seeing your stock picks going down, or all of this even out in the long run). You can relax this assumption and add it to your total return if you derive some net benefit from this stock picking.</li> <li><strong>You gain a long-run 2% outperformance over the index</strong>. Considering that most money managers lose to the index in the long run after fees, this is a very generous assumption. But you need an outperformance assumption to even have a discussion about stock picking making financial sense.</li> </ol> <p>***another baby assumption: <strong>you did not obtain this outperformance for free</strong>. Eg., you did not outperform by simply getting free stock tips from friends or works, etc.</p> <ol> <li><strong>You're an average American with $63,500 in annual salary</strong>. Needless to say, if you're high paying worker, stock picking makes even less sense for your opportunity cost. At 40hr/week for 50 weeks, this comes down to $32.5/hr wage.</li> </ol> <p>4) <strong>You derive no net benefit from obtaining uncorrelated returns</strong>. Many of the benefits touted by hedge funds is not that it beat the indexes, but that it give investors "uncorrelated returns." So during bear or bull market, funds will have different returns compared to the indexes.</p> <p>5) <strong>You have no additional transaction costs picking stocks over indexes</strong>. Easy enough in this zero-fee environment. Note: does not apply to pay-for-order flow brokers.</p> <p>6)??? I probably missed something. But these will do.</p> <p><strong>Calculation</strong>:</p> <p>So, at 2% outperformance, you will make an extra $200 with a $10,000 portfolio, $2000 with a $100,000, $20,000 with a $1,000,000, etc.</p> <p>As you can see, at $63,500 annual salary opportunity cost, you will need $3,1785,00 in total portfolio value for your effort to make sense, assuming that you treat stock picking as a full-time job.</p> <p>My Excel game is no longer what it was, so I am too lazy to create a line chart that could visualize this. Imagine that the 2% extra return of your portfolio grow as your total portfolio grow. That line needs to cross the $63,500 in opportunity cost before it even makes sense for you to consider stock picking as a full time job.</p> <p>Now, let's say you don't need 40 hr/week to consistently outperform the market. So instead let's say you need 20 hr/week. That would mean you need $1,892,500 in total portfolio value to make a difference financially as a stock pickers.</p> <p>Further reducing the workweek to 10 hr/week, it would be $946,250 as the point of excess return over opportunity cost.</p> <p><strong>What's my point?</strong> TL;DR: It means that for a lot of investors, including yours truly, it doesn't make financial sense until you become a multimillionaire to be picking stocks, even if you truly have a consistent edge over the market.</p> <p>Obviously, if you can relax any of these assumption in your favor, that change the calculus. For me it's assumption 1) that made a difference. What's yours?</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/pml1990"> /u/pml1990 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/r8emkv/how_much_does_your_portfolio_need_to_be_to_make/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/r8emkv/how_much_does_your_portfolio_need_to_be_to_make/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p>Fellow investors,</p> <p>I am out of new investing idea, so for this post I'd like to discuss something that is often ignored: How much money do you need to have in your portfolio to make it worth your while as an individual-stock picker? Central to this question is the opportunity cost that all stock pickers go up against: the almighty index funds!!</p> <p>Simple enough, your performance over the long run needs to be judged against a broad-market index fund, for which you incur no sweat and no effort holding.</p> <p><strong>Assumptions</strong> (these are meant to simplify the calculation of opportunity cost):</p> <ol> <li><strong>You derive no net intrinsic benefit from your action of picking stocks</strong> (so no net emotional rewards, no net benefit in learning and gaining experience as a stock picker, no pain or suffering seeing your stock picks going down, or all of this even out in the long run). You can relax this assumption and add it to your total return if you derive some net benefit from this stock picking.</li> <li><strong>You gain a long-run 2% outperformance over the index</strong>. Considering that most money managers lose to the index in the long run after fees, this is a very generous assumption. But you need an outperformance assumption to even have a discussion about stock picking making financial sense.</li> </ol> <p>***another baby assumption: <strong>you did not obtain this outperformance for free</strong>. Eg., you did not outperform by simply getting free stock tips from friends or works, etc.</p> <ol> <li><strong>You're an average American with $63,500 in annual salary</strong>. Needless to say, if you're high paying worker, stock picking makes even less sense for your opportunity cost. At 40hr/week for 50 weeks, this comes down to $32.5/hr wage.</li> </ol> <p>4) <strong>You derive no net benefit from obtaining uncorrelated returns</strong>. Many of the benefits touted by hedge funds is not that it beat the indexes, but that it give investors "uncorrelated returns." So during bear or bull market, funds will have different returns compared to the indexes.</p> <p>5) <strong>You have no additional transaction costs picking stocks over indexes</strong>. Easy enough in this zero-fee environment. Note: does not apply to pay-for-order flow brokers.</p> <p>6)??? I probably missed something. But these will do.</p> <p><strong>Calculation</strong>:</p> <p>So, at 2% outperformance, you will make an extra $200 with a $10,000 portfolio, $2000 with a $100,000, $20,000 with a $1,000,000, etc.</p> <p>As you can see, at $63,500 annual salary opportunity cost, you will need $3,1785,00 in total portfolio value for your effort to make sense, assuming that you treat stock picking as a full-time job.</p> <p>My Excel game is no longer what it was, so I am too lazy to create a line chart that could visualize this. Imagine that the 2% extra return of your portfolio grow as your total portfolio grow. That line needs to cross the $63,500 in opportunity cost before it even makes sense for you to consider stock picking as a full time job.</p> <p>Now, let's say you don't need 40 hr/week to consistently outperform the market. So instead let's say you need 20 hr/week. That would mean you need $1,892,500 in total portfolio value to make a difference financially as a stock pickers.</p> <p>Further reducing the workweek to 10 hr/week, it would be $946,250 as the point of excess return over opportunity cost.</p> <p><strong>What's my point?</strong> TL;DR: It means that for a lot of investors, including yours truly, it doesn't make financial sense until you become a multimillionaire to be picking stocks, even if you truly have a consistent edge over the market.</p> <p>Obviously, if you can relax any of these assumption in your favor, that change the calculus. For me it's assumption 1) that made a difference. What's yours?</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/pml1990"> /u/pml1990 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/r8emkv/how_much_does_your_portfolio_need_to_be_to_make/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/r8emkv/how_much_does_your_portfolio_need_to_be_to_make/">[comments]</a></span>Kind Regards R