Financial Planning for Geeks

Yes, But What About Your Return on Hassle?

- Investments

How much do your investments really cost you?

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What do you mean, the toilet is out of order again?

For the last few months, I’ve been writing a variety of posts about investment basics. Let’s cleanse the palate this time with an entirely new topic: Return on Hassle (ROH). What is ROH and why does it matter for us as investors?

Let’s start out by examining the concept, which seems to have originated with Mitchell Baldridge. The idea is that we need to consider how much time and effort we’re spending on our investments when we calculate their returns. How much hassle is involved in delivering those returns? What is the cost of that hassle?

Baldridge defines ROH as Money Earned / (Money Invested + Time + Brain Damage). In contrast to this, we usually define our investment returns only in terms of the Money Earned / Money Invested. We don’t take into account the time, work, stress, and other costs associated with acquiring and maintaining our investments.

Real estate investing is a good example. Buying and managing rental homes might seem like a great idea, but what about all the hassle associated with it? Those hassles might include:

·        The debt you might take on to fund it, which is a financial cost as well as a potential stressor. This debt might keep you from other financial opportunities or reduce your ability to handle emergencies. It might also result in higher interest rates.

·        The work and expense of finding and acquiring the property.

·        The work and expense of finding tenants.

·        The work and expense of maintaining the property.

·        Legal costs.

·        The time, expense, and strain if you happen upon a nightmare tenant.

Please understand: I’m not saying you shouldn’t invest in rental homes or that the upside might not outweigh the downside. I’m just encouraging you to consider the hassle when you calculate your rate of return on this investment. For some of you it will be worth it, and for some of you it won’t. It is truly a question of preferences and what is a hassle for you.

Nick Baggiuli takes the concept of ROH a bit further and maps out a Return on Hassle Spectrum. He plots the hassle of certain investment types against their expected return. His point is that if you don’t think you can generate a high enough return to justify the hassle, you should avoid that investment.

A graph of ROH. T-Bills have the lowest hassle and expected returns, and starting your own business has the highest hassle and expected returns.

As you see here on Baggiuli’s spectrum, starting your own business can cost you a lot of time, money, and emotional juice. But if you’re the entrepreneurial type and it feels like excitement and joy instead of stress, it might be right for you. You must also believe your business can net you the returns to make the hassle worth it for you. Alternatively, if you are an extremely nervous investor, you might not want to stomach price fluctuations in the stock markets. You might prefer to invest in bonds or similar asset classes, but you will also notice that they net lower returns.

One thing I noticed about this spectrum is that the higher the hassle, the less certain the investment outcome. With T-Bills, you can be pretty confident you’re going to net your 4% or thereabouts over the long term. But if you own your own business or buy rental properties, the outcome is far less certain. You could go bankrupt or become a billionaire or anything in between; there is so much more complexity associated with these investments that the range of potential outcomes is huge. So, if you want to own your own rental properties or other business, you have to be willing to expend the effort and be committed to it over the long term, with the understanding that your return is never assured. You also have to be willing to accept that uncertainty.

Now that you’re familiar with Baggiuli’s spectrum, you can use it to figure out your own, personal sweet spot between expected return and hassle. Where do you believe the high returns lie? What’s worth it for you in terms of hassle? Here are some of the potential hassles you might consider as you weigh your options:

·        The emotional cost of price or value fluctuations in your investments.

·        The opportunity cost of putting money and resources in one investment versus another.

·        The cost of taxes, in terms of both tax preparation and the tax bill itself.

·        The emotional cost of not personally controlling your investment; for example, when you invest in stocks or bonds you have little control over how they perform.

·        The time and money it takes to research and acquire your investments, and how much you enjoy or don’t enjoy doing that.

·        The stress of allowing someone else to research and acquire your investments.

·        The time associated with maintaining your investments, and how much you enjoy or don’t enjoy doing that.

·        The impact of your investments on your personal relationships.

As you read through these potential hassles, you might be silently assessing each one. “I couldn’t deal with that,” you might think. Or, “Well, that wouldn’t really bother me if I thought the return would be high.” What’s right for you might be completely wrong for someone else, and that’s the adventure of it all (unless you’re not a fan of adventure in this context, which is 100% OK). Run through your investment opportunities and decide for yourself how much time, energy, and money you want to spend. Which hassles do you absolutely loathe dealing with? Which are OK for you, or even feel like fun? Which would you want to outsource? Are your investments worth it?

You may also have noticed that the Return on Hassle concept has broad applicability to other areas of your life. For example, you might decide not to clean your own house because it’s not worth the ROH. You might decide to get rid of half of your belongings because they’re cluttering up your space and life. You might decide NOT to buy a vacation home because you’re already tired of insuring, cleaning, and maintaining your first home. As someone who loves a peaceful life, applying the idea of ROH to my decisions has definitely helped me focus my energy where it’s most important. Where will it take you?

And a final note: ROH is a concept rooted in privilege. There are a lot of people who don’t have the option of caring about ROH because they’re just getting by. They have to take on hassles they don’t want just to make it through the day. If that’s your situation, I see you. If you have the resources to even consider ROH, as I do, let’s all recognize our privilege and maybe direct some of those resources to people who need them more than we do.  

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Penny Farthing

I, Penny Farthing (non-wizarding name Kerry Read ), actually have a day job in the world of finance. This blog came into being because of my deep and abiding love for geeks and Personal Finance.