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.
Notes:
1I’m not yet close enough yet, or old enough to worry seriously about drawdown rates.
Thx for sharing your thoughts on a roughly 50/50 Passive/DGI portfolio.A split like that is something I would aim for.
The ETFs would bring the diversification and tax optimization (Special rules in Belgium make some ETFs really interesting). The DGI portfolio would bring the income. Here, i would aim for 20-30 positions max. this makes the maintenance easy. And I would crowd source a lot… Then again, the crowd is a herd, when I look at KMI. SO, I would need to be more active here.
Think your maths might be a little off – a holding of £5,000 and a quarterly cost of £1.50 gives a [ 1.5 / 5000 = 0.0003 = ] 0.03% quarterly charge. Multiply this by 4 and you get 0.12% a year. While this is still cheaper than the index fund, and obviously gets cheaper the more you invest, it’s not quite as large a difference.
I personally don’t hold any direct shares because I don’t find the research aspect enjoyable enough (while interesting I find it very time consuming), but can see why people like to directly invest some of their assets.
thenumpty,
Good spot…article amended!
Passive dividend investing is certainly less labor intensive than getting “passive” income from rentals but rentals have one big advantage and that’s the ability to use leverage to grow your portfolio. If you happen to reside in a low cost housing area(not in the northeast or the hip tech towns) then you have the ability to generate a ton of income with as little as 100k through the power of leverage. There’s certainly a ton more risk with that strategy but it’s the reason a lot of people take that route and choose the additional workload over just putting the 100k in dividend paying stocks.
I’m on the dividend side though since I’m a bit risk averse and don’t want to deal with the stress of tenants/mortgages.
timeinthemarket,
I can’t disagree with you. Leverage has helped me to expand my modest buy to let portfolio but I’m conscious to not over leverage and run the risk of a major house price fall force me into a bad situation. Here some more details on my BTL strategy if you’re interested.
Have to say I was really gutted when it worked out we couldn’t keep our flat to rent out when we moved into our house but now I feel it’s been a blessing in disguise!
I’m all up for investing to be as passive as possible and there’s no way I’d think I could beat the market/index trackers without considerable hours of learning and research. And even then you could end up doing worse!
Now there are plenty of ways to diversify into property with REITs and crowd lending which are almost totally hands off. The upside might be less but it’s good enough considering the far less hassle they are.
Are you thinking of off loading any of the BTLs you own then….?
theFIREstarter,
No plans to offload the BTLs. My strategy is to still end up with an income split primarily between the stock market and the property. Of course if house prices (they can’t go forever though!) keep rising there might be a point where I might consider selling for the large capital gains and deploying the capital elsewhere if I can get a greater yield for an acceptable level of risk.
How about 2 boiler failures in 2 separate properties…on the same day! Not passive, not cheap.
But, whilst I love seeing the index trackers in the ISA grow, timeinthemarket’s point is key for me- leverage is a powerful tool (although obviously with great power, comes great responsibility). It’s certainly helping build our portfolio. If the choice is going down the more active path to achieve FI sooner, or getting there easier but slower, I’m game for the work.