As I sat on the train this morning watching the rain hammering against the window I suddenly became aware that I was no longer worrying about the electrical fault (and subsequent delay) that the conductor just announced. Instead my mind had wandered onto the downpour outside and the possibility of it causing a leak at one of my rental properties, particularly the old victorian terrace house with the 100 year old tiles on the roof.
After a fantastically care free bank holiday weekend spent with family and friends, the gloomy commuter train to the office had brought me back down to earth. I even checked my email just incase there was one from my tenant…which thankfully there wasn’t.
Anyone that has been in the buy to let market for any length of time will know that it is not a source of passive income. Over the last 12 months I’ve had the following things to oversee/deal with in regards to my property rentals:
- Replacement windows in one property
- 1 boiler breakdown/repair
- Faulty bath/shower mixer valve
- Wardrobe door repair
- Replacement door bell
- Gas safety certificate renewals
- 1 new tenant to find/onboard
Meanwhile all year my equity portfolio has been furiously pumping out dividend income each month with very little input required by me. On reflection this dividend income has been far easier to ‘earn’ than the rental income.
The active investments of course require more maintenance than the passive part of the portfolio. This tends to involve:
- Regular checking of price performance
- Reading of quarterly trading updates
- Reviewing annual reports
- Monitoring the news/performance of companies on my short list to invest in
- Varying levels of worry about all sorts of idiosyncratic things like oil prices, tobacco law suits, brexit, regulation, noodle scandals etc
However even further down the stress scale is the passive/index fund element of the portfolio (roughly 50%) that has required zero maintenance over the last 12 months. That’s a slight lie, occasionally I’ll check the expected dividend yields or ongoing fees of my chosen funds haven’t deviated too much to ensure they’re still ticking my requirements, but thats it really.
Most of my effort on these passive funds involves counting the dividends deposited into my brokerage account each quarter and decided where to reinvest them.
The satisfaction of money being deposited regularly into your account without having to do anything is a great feeling and gives me one less thing to worry about on a rainy Monday morning.
Say What….So Nothing to Worry About?
However it’s not all plain sailing with passive investments.
I’m sure I’m not alone in having concerns deep down into my psyche that tell me I’m leaving money on the table by investing passively. Here’s how the logic in my mind works:
1. The fees are too high
Despite the incredibly thin ongoing charges on funds like VHYL (currently 0.29% p.a.) there is a part of me that resents paying that 0.29% each year. The reason is most of my ‘active’ share investments are buy and forget investments. I enjoy stock picking but i’m a long way from being truly active.
I try to emulate the Sage and buy shares that i’ll hold forever. On these holdings I’ll typically pay around £15 in fees on purchase and £1.50 each quarter to reinvest the dividends. On a holding of say £5,000 that dividend reinvestment fee works out to 0.03% a quarter or 0.12% on an annual basis. In other words quite a slice less than 0.29%. Of course the larger the holdings, the smaller the dividend reinvestment fees are when they’re expressed as a %.
2. I can outperform the indices
Looking back at my historical portfolio performance I have outperformed my index trackers with my active portfolio consistently over the years. When I see the xls tell me this it makes my head swells and my ego tells me to do more of it.
So if I can create a portfolio with lower fees and better performance than my low cost index trackers why bother to go passive at all?
Well, first off as the old mantra goes:
Past performance is not a predictor of future performance.
Secondly and perhaps more importantly the big thing I get in return for these fees is diversification.
VHYL for example currently contains 1,152 holdings. If one of those companies goes bust it’ll barely register on my investment returns. If one of my active investments goes pop in the night then I’ll be much more likely to notice the hit to both the portfolio value and annual investment income.
The need for diversification is the main reason why I also hold direct property investments, a bit of quasi gold, cash, peer to peer lending etc etc. I want diversification not just across asset classes but also across brokers, fund platforms, sectors, asset types and asset classes.
Sure when the next big fall in global stock prices comes (i’m talking a -50% ish move) I’ll be stressing, even over the index funds I own and how much their value has fallen and future income might be at risk.
However this would be no different to how i’ll feel when the next big house price crash comes. As I’ve stated before the primary metric I focus on with all of my investments is not capital value but income. The aim of my investing journey is to live off the fruits of the money tree. I’m planning to retire early and live entirely off generated income1.
As the Money Tree continues to grow in size, so too do the potential risks/rewards associated with the active/self select component of the portfolio. An increase in risk is not something one should generally entertain as you get closer to retirement, quite the opposite.
As both the portfolio and I grow older, I find myself becoming increasingly drawn to passive investing and the advantages it brings. The appeal of a hassle/worry free income hitting my bank as I potter around enjoying life is an increasingly appealing on. As a result I’ll probably continue to increase the part it plays in my portfolio in the future.
1I’m not yet close enough yet, or old enough to worry seriously about drawdown rates.