Active management vs. passive income

I recently wrote an introductory article where I listed a slew of tactics for building wealth. In this article, I want to dive into what is a crucial aspect of making those strategies work: active management.

For some example of active management consider this: to engage in leveraged real estate you can’t simply “set it and forget it”. The same goes for buying stocks or over funding an EIUL. If you take a passive approach to managing your wealth, you will miss important things and possibly wreck any chances.

Real estate

Let’s look a little deeper at each of these. When it comes to real estate, the most important thing is having tenants in your rental properties. Empty units = no cash. If you have setup your mortgages to get automatically paid, this will drain your coffers quickly. In the area where my rentals are located, I have someone that I can pick up the phone and quickly get cracking on finding new tenants. She also can tell me what the going rate of rent is in the area. She gets a cut of the first month’s rent, but it’s worth it to ensure I’m getting the best rental income while also staying occupied.

I could try to let my property management company cover this task, but they are driven by one thing: occupancy. If they can spend less effort and get it occupied for a little less rent, they’ll do it. My tenant-finding agent doesn’t have the same motivations and so I can count on her to do her job of researching market rates and betting me the best deal. But to engage her services, I need to stay on top of things.

I have a good property manager that sends me emails when tenants are approaching the end of their lease. I also get notices when monthly payments come in. I don’t have to worry about this on a daily basis. But once a month, I need to ensure that everything is working properly and all my people are doing their jobs. This is different than the attitude of throwing money into your 401K plan and maybe looking at once-a-year. It is very different than assuming it’s going to turn in to a fistful of cash in ten years.

Stocks

When I invest some of my capital in dividend paying stocks like Chevron (CVX) and Vanguard Natural Resources (VNR), I need to monitor their dividend reports. Are these stocks continuing to pay the same or more in dividends? Dividend Growth Investor has a hard rule: when a company cuts dividends or stops paying altogether, abandon ship. Move your money somewhere else. His opinion is that this is one of the first actions taken by companies steering into risky waters. I haven’t adopted that rule wholeheartedly, but it probably makes sense to make such a decision now, because I get put into such a stressful circumstance. It means I need to ensure the dividend payments happen on schedule. There are usually press releases indicating scheduled payments or the lack thereof, so it’s not hard to keep up with. This is especially important considering I’m using the cash distributions from VNR to pay off my HELOC.

I need to NOT get sucked into the daily news about the fluctuations in stock price. In fact, Warren Buffett warns against being too plugged in as well. Instead, seeing quarterly dividend reports is the best indicator of success. The Conservative Investor actually goes so far as getting some classic stock issued shares to hang on your wall, a six pack of Coke (if you own KO), and even framing a dividend check to see everyday as a reminder that holding the stock is paying you money on a regular basis. Anything to remove you from the abstract concept of minute-by-minute price fluctuations, and instead focusing on quality of business and it’s flow of dividends into your pockets. Unless you’re prepared to think in this mindset, stocks can ruin you. If you see a 50% drop in price and it drives you panic, you will not succeed. But if you have thoroughly researched a list of companies and instead see these drops as mere opportunities caused by other irrational investor, then you can do very well.

EIULs

Finally, I have my EIUL funding setup on automatic. It makes things easier. This one truly is long term. If you cut out before twenty years, it would be for naught. One of the pieces of this plan is to increase monthly contributions by 4% every May. I’ve already done that once. It’s a task I do in order to emulate cost of living increases. I have more money, so why not put more money into my regular contributions. It creates a very strong improvement in the total build up of cash value.

Summary

Something that might have confused you is where I wrote “active management” in the title, and yet we are talking about things that are considered “passive income” according to the IRS. Active management is required to make sure everything is performing as expected. The style of investing where you throw money into some index funds and don’t track their historical performance, and even avoid the statements when you know the market is down can be referred to as “passive management.”

If something shifts out of alignment, it is up to me to respond properly. But most of my focus is on building passive streams of income so that when I get to retirement I no longer have to “actively” work to earn money for my day-to-day expenses. If you adopt a passive strategy, you might not realize your rental properties are either vacant, or one of your tenants is five months behind. You might not realize that one of your stocks is no longer paying you the dividends you planned on. And you might not be upping your contributions to your cash value life insurance policy.

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