Investing as a Hobby
Learn about the pros and cons of investing as a hobbyist.
We never have enough of it, and we frequently look back wishing for a few hours more per week. The Bureau of Labor Statistics surveys the time spent in selected activities for Americans by employment status and sex (see below table). Approximately three hours per day is left for leisure. If you’re like me, you might be thinking that you have far less than three hours per day of leisure time.
Knowing the scarcity of free time in our lives, is investing a worthwhile “hobby” or free time activity?
We all know the friend who supposedly bought stock in Apple fifteen years ago only to turn a modest sum of money into a small fortune. This could’ve been you, right? If you’re lucky enough to retire early, you might even think you could take up investing as a hobby and pastime. Here are a few issues to consider before embarking on such a path.
Picking winners, let alone extreme winners like Amazon or Apple is highly unlikely.
A recent JP Morgan study cited some startling statistics on Russell 3000 companies since 1980. Over this nearly 40 year time period, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value. Further, the return on the median stock since its inception vs. an investment in the Russell 3000 Index was ‑54%. Two-thirds of all stocks underperformed vs. the Russell 3000 Index, and for 40% of all stocks, their absolute returns were negative.
That’s not to say picking an extreme winner was impossible. The study showed that 7% of the universe generated a lifetime return two standard deviations above the mean return.
You’re likely at an informational disadvantage
This is not always the case as people can have insight into certain industries through their career, but on average, you’re most likely to be at an informational disadvantage versus professional investors. Just in New York alone, there are almost 1,300 hedge funds managing over $1.2T of assets. Mutual funds total over 9,300 with 43% focusing on US equities. These investors are far from infallible and are frequently wrong, but their primary job is to research and invest in companies they believe have a good chance to outperform.
Hobbies are meant to be regular and enjoyable
Unlike reading a book or playing a round a golf, successful investing often involves doing little or nothing for long periods of time. Moreover, over-trading can become a drag to investor performance. Eugene Fama once said, “Your money is like a bar of soap. The more you handle it, the less you’ll have.” Many average investors like to tinker with their portfolios, particularly in periods of volatility. These periods of panic can be devastating. A study by Dalbar found that the average investor earned 5% worse than the S&P 500 in 2018 due to poor market timing and over-trading.
So, what now?
It’s important to point out that I am not advocating for individual investors to remain uninformed about their investments and financial plan. Understanding and getting comfortable with an asset allocation that meets your goals, time frame, and financial situation will help you live through periods of market volatility.
Where investing as a hobby might be sensible is with a small amount of your assets that you can afford to lose and that you can handle psychologically. Being under the illusion that diving into investing in a meaningful way will result in above-average performance is dangerous and likely to end poorly based on historical studies. Stay informed and in the loop, but I would think long and hard before deciding to make investing a day-to-day hobby.
David Schawel, CFA
This material contains the current opinions of Family Management Corporation and its affiliates (collectively,“FMC”), which may change without notice. This material is distributed for informational purposes only. It is not a recommendation or offer of any investment or strategy. Nothing herein shall be considered a solicitation to buy or sell, or an offer to buy or sell, to or from any persons in any jurisdiction where such solicitation, offer, purchase, or sale would be unlawful. Information contained herein has been obtained from sources believed to be reliable but are not guaranteed. FMC provides no guarantees regarding the performance of any investment or strategy. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future performance and individual client results will vary. No part of this material may be reproduced in any form, or referred to in any publication, without the express written permission of FMC.