I cringe when I read how passive investing on social media is often described as sitting on a beach, sipping pina coladas, and doing no work. I suppose that is possible in theory. However, from my own experience (as both an active and a passive investor) this differs from reality. I do not want to burst your bubble. However, this myth has bothered me for some time and to a point where I think it is important to dispel a few misconceptions.
Accumulating the excess liquidity needed to invest in alternatives like buying a business or buying real estate for most people comes via generating active income and being fiscally responsible. In prior posts I have shared some of my thoughts on that topic and how to get started. This alone requires years of hard work and does not happen overnight.
Once one is in a position to invest that excess cash and diversify outside of the stock market and once there is clarity re one’s investment goals and objectives, there are certain steps investors should take in order to minimize the risk of loss (after all, all investments carry risk).
It starts with education. Understanding the underlying asset class, how it makes money, what type of diligence is required to properly vet the asset class, market, sub-market, operator/fund manager, and the deal itself. That process takes time and requires reading multiple books and guides, connecting with fellow investors, attending industry events (like meet ups and conferences), learning how to analyze a deal, and reviewing multiple deals and offerings.
As investors, when presented with an investment opportunity, we then move to the verify then trust stage, where we perform the required due diligence on the underlying investment to determine if its risk/return profile aligns with our own investment objectives.
Even after closing on a deal, I encourage investors to monitor their investment via the monthly/quarterly reporting provided by the lead sponsor/fund manager, even when the distributions are flowing. This will provide you with a good perspective on the various reports, their level of detail, and the communication style of each sponsor/fund manager. In addition, this will allow you to spot any unusual trends early and ask the important questions (vs. being surprised when a capital call is executed or seeing distributions pause).
Last but not least, managing one’s investment portfolio requires strategic tax planning, especially when facing situations of an upcoming exit with a large gain. This is why working with a seasoned tax advisor well versed in real estate is extremely important.
I realize this article may have burst the bubble for many. However, I felt it is important to speak about the topic because after all there is no free lunch. Time, effort to get educated and follow the markets and trends, persistence, and patience are key ingredients for success in investing …so you can enjoy a little bit of time off on the beach sipping pina coladas.
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Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.