Cost, Schedule, Performance – Pick 2, Part II: COTS components


So, what about focusing on investment performance in your financial independence project? We’d all like to become financially independent as soon as possible, at the lowest cost, so shouldn’t we spend most of our time focused on investment performance? No, and here’s why.


Although each of us is unique, our financial independence projects have a lot in common. As a project manager, what do you think about when you see a lot of other projects similar to yours? I don’t know about you, but I think about using Commercial Off The Shelf (COTS) components. COTS components are generally expected to provide the highest reliability at the lowest cost, and enable the project manager to focus on the hard parts of the project that don’t have COTS solutions.


From a project management perspective, the consideration that overarches cost, schedule and performance is risk. You want the highest possible chance for your project to succeed. Why would you risk your chances of success by reinventing a major component that has a great-fitting, highly reliable COTS solution? The performance of your investments is your project’s power source. Why not get a COTS power source with evidence of reliable high performance across millions of users? Why would you spend your time finding an exotic power source with a 20% chance of performing better, and an 80% chance of performing worse? And, unless you’re a thrill seeker, why would you design and build your own power source with enormously expanded probabilities of fizzling, blowing up, or just simply under-performing? The financial analogy to a COTS power source is, of course, an index fund. There’s a lot more to be said about index funds but this post is about an engineer’s perspective. (Check out the “Reading List” on my web site for more on index funds.)


Maybe you really enjoy researching and trading investments. Engineers like us love “opening up the hood,” “figuring it out,” and “fixing it ourselves.” At home, I’ve tackled cars, plumbing, wiring, computers and other fun stuff. Yes, it is fun. What I’ve learned though, is that I’m not a professional mechanic, plumber, electrician, or IT guy/gal. I can do in three hours what it takes a professional one hour. I can do in three trips to the parts/hardware store what a professional can do in one trip. I’ve also learned to always have a backup. For example, I don’t take the car apart unless I have an alternative way to get to work. In other words, I have fun and get my “do-it-yourself” fix, but I also limit my risk.


But wait, although I’m not a professional tradesman, am I NOT a professional investment advisor? Yes, I am. And frankly, as an engineer, investment advisor and financial planner, I’m very impressed with the performance and reliability of COTS index funds. I’m equally unimpressed with the performance of professional portfolio managers, and the near impossibility of picking the winners before the end of the race. I don’t “play around” with investments and I don’t recommend that my clients do so either. I go with the COTS solution.


As stated in an earlier blog, with the U.S. economy growing at an average rate of 2% per year and an average dividend of 2% per year, your ability to increase your rate of return (performance) has a pretty firm ceiling. You can increase this slightly by choosing small cap, value, and emerging market equities but again, you have a pretty firm ceiling. Optimizing COTS investments (index funds) that consistently capture nearly all of the available broad market return for a given risk tolerance and capacity is the easy part of a financial independence project. Just do it and move on. The more challenging parts of the project, and the areas that require more attention, are optimizing individual cost, schedule, and risk. I spend the majority my personal and professional financial time on these.


As an engineer I enjoy “opening up the hood,” “figuring it out,” and “fixing it myself.” Even more than that, I enjoy my financial independence. So, that said, I don’t play around with investment portfolios. I have other hobbies that are a lot more fun and satisfying, and don’t jeopardize my financial independence.


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