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Investing as a Hobby

Learn about the pros and cons of invest­ing as a hobbyist. 

Time.

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.