So you’ve got a little extra cash?

You are likely a mid-senior level manager who has worked hard, invested diligently and are now in a place where you can look forward and begin to plan your future. You begin to do research and learn about the 4% rule and based on your calculations you’ll need about $3 million invested to generate $120,000 in pre-tax income in retirement. You check your 401K balances and realize that if you max out each year and add Social Security income you’ll still need to work until your 67 years old. This can’t be life.

Multitasking is a way of life and time is your most precious asset. With a demanding job and young family, there is no time for additional investments, but you’ve finally got some extra cash, and EVERYBODY knows “Cash is Trash.”

Enter passive investments. An investment that you don’t have to actively manage yet still generates cashflow and appreciation? Sign me up! At this stage most people turn towards real estate, dividends or some sort of syndicate.

The allure of earning returns without actively managing or frequently monitoring them seems undoubtedly enticing. However, there is a hidden truth that often goes unnoticed – passive investments, in reality, are not entirely passive. This article dives deep into the notion that even the most seemingly hands-off investments, even financially lucrative ones, require mental space, emotionally connecting investors to their investments. Let’s explore why the concept of “passive” holds an elusive grip on our financial pursuits.

The Myth of Passive Investments

When we hear the term “passive investment,” we might conjure images of hassle-free financial gains with minimal effort. However, the truth is that these investments, while certainly less demanding than active strategies, still command attention and mental space.

The Perceptible Benefits of Passivity

Investors are often drawn to passive investments due to the perceived benefits they offer. These include lower fees, reduced time commitment, and the ability to mirror broad market performance. While these advantages are certainly attractive, they do not come without hidden costs.

The Psychological Burden of Passive Investing

Despite their name, passive investments subtly occupy our mental space by instilling emotions that can influence our decision-making processes. Here are a few ways in which the myth of passivity collides with emotional involvement:

1. Emotional Connection:
   Even though passive investments lack active management, investors tend to develop an emotional attachment and sense of ownership. This connection becomes apparent during times of market volatility or external events influencing investment performance. For example, owning a Florida home that you seldom visit might still trigger concerns over its well-being during a hurricane, impeding true emotional detachment.
2. FOMO and Information Overload:
   Passive investors may often wrestle with “Fear of Missing Out” (FOMO) in rapidly changing markets. Though they might resist the urge to act, being inundated with news and updates can fuel anxiety and a compulsion to monitor financial developments constantly, disrupting the notion of passivity.
3. The Paradox of Choice:
   The wide array of passive investment options available today can be overwhelming. Deciding on the right asset allocation, geographical exposure, or thematic focus can cause decision paralysis. This mental burden detracts from the notion of passivity, as investors grapple with the responsibility of choosing the “right” passive investment strategy.
4. Managing the Manager:
   While many operators are skilled, there are many that are not. To find out the difference, you will have to spend a considerable amount of time sifting through reviews, doing interviews and your own diligence online. Even with this, you are not sure to find a great manager of your investment, but even if you do, you will still need to speak to them on a regular basis to get business and financial updates.
5. Company Financial Statements:
   While your investment may be managed passively, your taxes are your responsibility. One advantage that is widely discussed is the tax benefit of owning your own business. But to take advantage of these, you must track your expenses diligently and separate between personal and business expenses. You must maintain proper books and file separate taxes. This all comes with additional time or investment in a great CPA and bookkeeper, which is highly recommended.

Navigating the Fine Line Between Passive and Active Engagement

While passive investments may never truly offer complete detachment, certain strategies can help investors strike a balance and mitigate the psychological burden associated with them:

1. Adopt a Long-Term Mindset:
   Embracing a long-term perspective helps investors weather short-term market turbulence without succumbing to emotional decision-making. Building a well-diversified portfolio based on personal financial goals and risk tolerance can reduce the compulsion to actively monitor investments.
2. Set It and Forget It, a stock market strategy:
   Automating investment contributions, which increase with salary and bonus increases, and rebalancing can minimize the need for constant tinkering. Establishing a disciplined approach through automatic transfers and portfolio rebalancing ensures that investments are free from reactionary adjustments driven by emotion or market noise.
3. Practice Mindful Information Consumption:
   While staying informed is vital, investors should be mindful of the information they consume. Limiting exposure to financial news and adopting a selective approach to market information can help avoid excessive anxiety and prevent the erosion of passivity.

Conclusion

The concept of passive investing may seem alluring with its promise of hands-off financial gains. However, it is crucial to recognize the thin line between passivity and the mental space engaged by these investments. Acknowledging the emotional attachments, information overload, and decision uncertainties that come with passive investing empowers investors to find a more balanced approach. By adopting a long-term mindset, embracing automation, and practicing mindful consumption of financial information, investors can navigate this intricate landscape while preserving mental well-being. Ultimately, it is through this introspection and awareness that true passive investing can be achieved, albeit not without a degree of mental involvement.

Buying a home has always been a part of the American dream. But, in recent years, that “wisdom” has come into question.

With interest rates and home prices both rapidly rising, homeowners who bought during COVID with low rate mortgages have little incentive to sell and move. Many bought their dream homes, when the prospect of ongoing lockdowns and spending the foreseeable future at home was a reality. They have low payments and tons of equity, so moving has to be enticing, leading to a shortage of choices and bidding wars.

So how do you decide?

Once you know your budget, where you want to live and what type of property you want to live in and how long you want to be in the next place, let’s begin by researching the rental rates for something comparable. A common misconception is that rentals are mostly condos and apartment buildings. A quick Zillow search and filter will show you almost every type of property is available for rent, even if you want a house with a yard and a pool.

You then compare this to a mortgage for a comparable house, to see if investing the difference would yield better results.

Time for a real world example

For our example, we are going to look at a couple searching for their next home in Jacksonville, FL. They are looking for a 2 bed, 1 bath with a yard for their dog and think they’ll live in their next home for around 10 years.

The Rental Scenario

A quick search shows rental rates for properties that fit their criteria are around $1,800 per month, which is the most they can pay (plus about 3-5% increases annually throughout the term). Add to this about $10 per month for renter’s insurance.

The Buying Scenario

Ok, now let’s find out how much a similar home would cost them to buy, hold for ten years and sell.

So, homes that meet their criteria sell for around $300K. Property taxes are estimated to be 1.03% of sales price. Assuming your taxes never go up, lol, your mortgage payment would be around $1,950 per month.

But you’re not done yet. To this you need to add homeowner’s insurance, outside maintenance (like landscaping, roof and siding), indoor maintenance (like floors, appliance repairs etc), water/sewer, garbage pickups and general upkeep including renovations (either for you to enjoy or for the next person as you prep for sale). All said and done, the real monthly payment would be something like $3,100.

So let’s compare results

So the total cost of homeownership in year one is almost $1,300 over renting. But, to be fair, your rent will increase, so on average over the course of 10 years, you’ll have $850 to invest each month. And don’t forget the $60K down payment you made.

In aggregate, the amount of savings each month from the rent plus the initial down payment, growing at around 7% per year you would have around $260K in an investment account. Not bad for “paying somebody else’s mortgage.”

Now let’s compare this to a home purchase. At the end of the 10 years their $300K home would now be worth $510K! Over the same time you would have paid down your mortgage by $32K, leaving a balance of $208K. Ok so let’s sell this house and see which one worked out better.

When it’s time to sell, you’ll have to pay your broker, title company and government transfer taxes. This is typically around 10% of sales price, or in this case $51K. After paying off the mortgage, you are left with $251K! Again not bad, but $9K less than if you had invested the down payment and each month’s savings.

So should you rent or buy?

In this case, the calculations showed renting was a better option. But this could have been different if they were staying their longer, or found a cheaper or newer home. There are many variables that are different for each of us, but best way to do it is to run the numbers for you and see what works out best.

If you want a copy of the Google Sheet displayed in this post feel free to get in touch with me and I will grant you access to the community version.