2981: What It Means To Be A Passive Investor by Kiersten Saunders of Rich And Regular on Investment Advice

[00:00:00] This is Optimal Finance Daily, What It Means To Be A Passive Investor by Kiersten Saunders of richandregular.com.

[00:00:08] You ever notice that nobody calls you passive as a compliment? It's usually more of an accusation, like you're so passive.

[00:00:17] Passive is one of those descriptors that makes you feel lesser than. You're less powerful, less authoritative, less in control if you're passive.

[00:00:26] If you're the more passive parent, you're usually the reason for the morning rush fight.

[00:00:31] If you're the more passive spouse, you're super familiar with the what's for dinner fight.

[00:00:36] Come to think of it, in the context of interpersonal relationships, passive might just be a fightin' word.

[00:00:42] But in the context of personal finance, the word passive takes on a different connotation.

[00:00:48] And recently, I've stopped trying to grapple with that because being passive investors is our sweet spot.

[00:00:55] Passive investing versus active investing is one of those debates that can get as heated as drums versus flats.

[00:01:02] Flats for the win, by the way.

[00:01:04] It's not necessarily an either or, but most portfolios reflect a bias towards one approach or the other.

[00:01:11] This is one of the reasons why good advice can be hard to find because results are always relative to the risk.

[00:01:17] And risk is always relative to that individual.

[00:01:21] The difference between a passive investor and an active one isn't really a matter of savviness.

[00:01:26] It's a choice.

[00:01:28] Our choice was a reflection of how we prefer to spend our energy.

[00:01:32] For our real estate investments, that means we don't flip homes.

[00:01:36] We buy, hold, and use a local management company to handle tenant-related issues and payment collection.

[00:01:42] In exchange, we pay them a percentage of the rent each month.

[00:01:45] For our investment portfolio, we buy passively managed index funds,

[00:01:50] and we pay a small service fee to cover the costs associated with running the fund.

[00:01:54] The reasons for this approach were lower fees.

[00:01:59] Very few things in life are free, but actively managing a fund that is buying and selling securities really isn't free.

[00:02:08] Every time a transaction takes place, there is a fee attached.

[00:02:12] That means that even if the fund performs well, it could quickly be eroded by the overhead costs associated with performing well.

[00:02:19] So for example, the fees for our Vanguard Admiral shares are 84% lower than the industry average.

[00:02:27] In other words, if my passively managed fund delivers a 7% return with a 0.18 fee, so now we're at a 6.82% return,

[00:02:38] and a comparable actively managed fund delivers 8% at a 1.5% fee, so now that's a 6.5% return, who really won?

[00:02:49] That may not seem like a huge loss in a year, but in the spirit of the OG Jack Bogle, rest in peace,

[00:02:56] compounding fees have the opposite effect of compounding interest over time.

[00:03:02] Transparency

[00:03:03] As passive as we are, we're still the kind of investors who want to understand how this sausage is made.

[00:03:09] By using index funds, our money tracks the market.

[00:03:12] If I'm watching the news and see that the S&P rose 2%, I can draw conclusions about what my money did.

[00:03:19] For me, this is a version of control that feels empowering.

[00:03:23] When you opt for an actively managed portfolio, you trade that level of transparency for the promise of market expertise.

[00:03:32] Lower tax burden

[00:03:34] As high earners, we were already near the top of an income bracket.

[00:03:38] With a buy and hold strategy for real estate, we also have a great tax shelter.

[00:03:43] By automatically reinvesting the gains on our stock portfolio,

[00:03:47] we avoid paying taxes on the growth every year.

[00:03:50] You know what's funny though?

[00:03:51] As much sense as those reasons make, I had to do a lot of upfront work to learn how to be a good passive investor.

[00:03:58] At times, I've struggled with the simplicity of it all.

[00:04:02] Approaching anything passively is the opposite of the advice I had internalized all these years.

[00:04:08] If I had a dollar for every time guidance like,

[00:04:11] you have to work twice as hard to get half the credit,

[00:04:14] or fortune favors the bold has echoed through my head, I would already be retired.

[00:04:19] I had to learn the difference between confidence and competence.

[00:04:23] I had a lot of confidence that we could be great active investors.

[00:04:27] I've also seen firsthand how that same confidence could distort our level of risk and cause us to make bad decisions.

[00:04:34] On the flip side, developing the level of competence needed to be an active investor felt like a job.

[00:04:41] Lord knows I don't need another one of those.

[00:04:44] I also had to embrace how long the long game actually was.

[00:04:48] I tend to overestimate what could happen in one year,

[00:04:51] but underestimate what could happen in five.

[00:04:54] Becoming a passive investor meant I had to imagine life and market performance in 30 years or 40 years.

[00:05:01] Thinking about my life in 30 years is scary.

[00:05:04] It makes me think about my own mortality.

[00:05:07] It causes me to imagine a life where some of the people I love the most are missing.

[00:05:12] Through it, I realized that if I perceive time as something to be feared,

[00:05:16] everything that requires it will be seen as a problem.

[00:05:19] That mindset is not only at odds with our investment strategy,

[00:05:23] it conflicts with our vision for freedom.

[00:05:25] My investor sweet spot forces me to address my long standing habit of efforting,

[00:05:31] instead of just giving things the time they need.

[00:05:34] So much of my previous debt was because I was trying to manage my fears by taking action with my money.

[00:05:41] My path to financial independence is about unlearning that every chance I get,

[00:05:46] so I don't repeat those same mistakes.

[00:05:52] You just listened to the post titled,

[00:05:54] What it means to be a passive investor by Kirsten Saunders of richandregular.com.

[00:06:00] I really loved Kirsten's explanation on why she embraces passive investing in this article.

[00:06:05] And I'm in the same boat.

[00:06:07] I got on board with passive investing after reading the book,

[00:06:10] The Simple Path to Wealth by JL Collins.

[00:06:13] This was the book that finally got me comfortable with investing and really convinced me that passive investing is a winning strategy.

[00:06:22] JL makes a compelling case for keeping things simple.

[00:06:25] And for someone like me, who's always found investing so intimidating, this approach works so well.

[00:06:30] So if you haven't read this book yet, I highly recommend it.

[00:06:33] I think another reason why passive investing is compelling is that index funds outperform the majority of actively managed mutual funds over the long term.

[00:06:43] So not only are you saving time and energy, if you're investing for the long term, you'll likely get a better return.

[00:06:51] That should do it for another edition of Optimal Finance Daily.

[00:06:55] I'll be back tomorrow as usual.

[00:06:56] So I'll see you there on the Wednesday show where your optimal life awaits.