Passivity isn’t necessarily a bad thing, but it’s definitely not great for your long-term wealth.
The path of least resistance is not the approach you want to take when it comes to your investments and building long-term wealth. For many, for whatever reason – lack of time, lack of interest, etc. – doing nothing is their idea of an investment plan.
For others, doing little is their plan – thinking that putting money in the hands of strangers like banks, insurance companies, and fund managers with no personal involvement is the best approach. They drink from the finance world’s Kool-Aid and subject their finances to the whims of outside forces. All they have to do is sit back and watch the money roll in, right? Not exactly.
The problem with passivity is that turning a blind eye to your investments will not build wealth in the best case scenario and lead to disaster in the worst case.
The outside forces the apathetic investor submits to don’t have his best interest in mind. Inflation, recessions, high fund fees are all equal opportunity wealth destroyers.
By putting your money with banks and insurance companies in the form of CDs, money market accounts, and annuities to earn minimal returns in the name of ease and security, you’re submitting to the destructive forces of inflation.
Inflation has consistently outpaced returns on these bank and insurance products historically. In all honesty, you’re better off putting your money under the mattress.
The previous scenario is no better than putting your trust in mutual funds, index funds, and other market products where you’re subjecting yourself to market volatility and high fees where managers and advisers get fat whether you make money or not.
Another problem with passivity is it removes all personal responsibility from your financial path.
Blame only comes when things go south, and the apathetic investor will never blame themselves if their portfolio underperforms or if they lose money.
It’s always something or someone else’s fault. They blame inflation, the economy, Wall Street, financial advisors, fund managers, and everything else under the sun for their predicament.
Passivity sets investors up to fail. If failure is never going to be their fault, they’ll take very few precautions to avoid it.
Passivity should be a crime because it makes slaves out of investors – slaves to the market, big banks, insurance companies, and Wall Street. Passivity is not a quality of smart, savvy investors. They are slaves to no one.
Savvy investors actively manage their wealth based on their goals. That doesn’t mean they won’t rely on the expertise of others or leverage the infrastructure, processes, and knowledge of companies better suited to invest in certain markets and asset classes. It’s just that they like to be actively involved. They could be considered active, passive investors.
To savvy investors, active investing doesn’t mean doing all the work themselves. They love passive investments, but they have to be the right ones – ones that match their investment objectives.
For these investors, their money isn’t an infomercial chicken roaster where you can just “set it and forget it.” They want to be involved.
Unsatisfied with the returns from CDs, Money Market accounts, annuities and bonds, and leery of volatile Wall Street offerings like index funds and mutual funds, savvy investors look to alternative investments like private real estate funds and private equity where they can actively manage their investments without doing the heavy lifting.
The active part of their involvement in passive investments comes mostly in the pre-investment phase. They can’t control everything that happens once they place their money with a fund, but they will control as much as they can before those funds are wired over.
If they’ve done their homework, they’ll be confident about how that money will be used. Being actively involved in investments they’ve made minimizes risk and maximizes potential returns.
Take a real estate fund, for example. The most crucial item in evaluating a passive real estate opportunity is the management company. The savvy investor will interview the managers and scrutinize their track record with a fine-tooth comb.
Do they have the requisite experience and knowledge in the asset class and locales in which they are proposing to invest? Then they’ll weigh management expertise against the investment objectives and see if those things match – along with their investment objectives.
They’ll pull the trigger only if everything lines up. And they’ll never get to that point without being active.
Why do savvy investors go through all this work? Why not just throw their capital into something easy?
Because they know that in order to do better than inflation and the market in general, they have to take control of their own investments. They turn to alternative investments like private real estate funds for the highest risk-adjusted returns of any investment asset class.
Don’t give in to passivity and be satisfied with negative inflation-adjusted returns from the typical bank, insurance company, and Wall Street drivel.
There are ways to make high ROI without the volatility.
You have to take an active role in your investment in building the type of long-term wealth everyone covets.