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Imagine two investors, Grinding Gretchen and Relaxed Rachel, who both start with $50,000 to invest.
Most people—including Gretchen—think they’ll sprint or trip based on market timing, hustle, luck, or choosing the perfect market.
Rachel takes a different approach. Here’s why investors like her will not only come out ahead in the long run, but also have more fun and get better sleep along the way.
Good Investors Don’t Time the Market
It’s so tempting to try to time the market, because it feels like you should be able to spot the bottom and the top—they always look so obvious in hindsight.
You’ve heard it before, but it bears repeating: Time in the market always beats timing the market. You don’t have to be perfectly right twice (buying and selling); you don’t skip years-long periods trying to wait for the perfect moment to invest. Remember, the next market low could still be priced higher than today’s pricing, given all the appreciation between now and then.
Trying to time the market also encourages bad behaviors like trend chasing and panic selling. You see one asset class overperforming and say, “That must be the next big thing! I’ll put a bunch of money in that.” Meanwhile, that asset class has already done most of its booming and is poised for a crash.
Or you look at an asset class that has recently crashed and say, “I won’t touch that with a 10-foot pole.” That asset class is actually poised for recovery. “Buy when there’s blood in the streets” and all that.
Consistent Investing
Instead, investors who win in the long term keep investing slowly and steadily, month in and month out. There’s a term for this in finance: dollar-cost averaging. I practice it with my stock investments and my real estate investments.
Every month, I invest around $5,000 in a new passive investment through my co-investing club. Collectively, we invest $400,000 to $800,000, but I personally just invest $2,500 to $10,000.
I can hear the skeptical voice in your head now: “I don’t have that much to invest every month.” There are two solutions to that problem: Either invest at a slower cadence (like bimonthly or quarterly) or boost your savings rate. Start by freezing your lifestyle inflation.
Because that’s part of Grinding Gretchen’s problem: She keeps spending more as she earns more, so she never has as much left over to invest as she wants, and she keeps moving the goalposts on how much nest egg she needs.
As old investments pay off, reinvest the returns. You earn compound returns from consistent investing over years, not waiting on the sidelines to try and find the “perfect” deal.
Leverage People, Not Just Money
When real estate investors hear “leverage,” they immediately think “debt.”
Sure, that’s one type of leverage. But it’s not the only type.
To begin with, you can leverage other people’s expertise. That’s a huge advantage to an investment club: You get the benefit of all the other members’ knowledge. My co-investing club vets deals together on a big video call so we can all grill the operator and analyze risk together.
Speaking of operators, that raises another type of leverage: labor and time. After a miserable decade-plus as a landlord and active investor, I unloaded all my rental properties in my late 30s. Today I only invest passively, which includes investments like syndications, silent joint venture partnerships, private notes, and funds.
Someone else hassles with tenants, property managers, city inspectors, contractors, and the like. I just watch the cash flow hit my bank account.
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Your time is a limited resource. Every hour you spend putzing with tenants and toilets is an hour you can’t spend boosting your career, building a side business, or spending time with family or friends.
Liability Management
When I was an active investor, I took on both legal liability and debt liability. I was sued several times as a landlord. It sucked, costing me money, time, stress, and lost sleep.
On the debt side, when I signed for loans, I didn’t just put up the property as collateral. I had to sign a personal guarantee. If I defaulted, the lender could come after every personal asset I own.
I don’t have that liability risk as a passive investor. No one can sue me or come after my personal assets. That risk is outsourced to the deal operator. This matters to your long-term success as an investor for two reasons.
First, losses could wipe out your entire net worth, and then some. A judgment doesn’t go away when your net worth hits $0; creditors can attach liens to your home and garnish part of each paycheck you earn.
Second, it can also demoralize you so badly that you quit investing in real estate entirely. Either way, it’s Game Over for you.
Risk Management
Liability is, of course, one type of risk. But investors face many other types of risk, and the best investors layer in several ways to mitigate them.
I’m willing to accept market risk. The stock market and the real estate market don’t always go up, after all. Sometimes they dip or even crash. (That’s one reason I practice dollar-cost averaging—so I get the benefits of those lower prices and don’t get too peeved.)
Even so, I still look for protections against it when possible. I want to see conservative underwriting assumptions such as slow rent growth projections and high expense growth projections. I want to see a solid preferred return, low operator fees, and an operator with plenty of their own skin in the game.
I also look for extra downside risk protections. For example, in some of the private partnerships we’ve negotiated in my co-investing club, the operator guaranteed us a minimum return on our investment, even if the deal underperformed. In one of those cases, a house flip didn’t go our way, but we still earned the 8% floor return on it.
Again, your goal as an investor is longevity, building long-term wealth. You’ll have your share of hiccups along the way, so try to minimize risk where you can and spread it out where you can’t.
One of those is operator risk. I want to make sure that the operators I invest with are both competent and honest. While you can never eliminate that risk 100%, you can minimize it through operator due diligence.
Portfolio Planning
Long-term success as an investor also involves intentional planning for your portfolio. How much of your portfolio should sit in stocks? In real estate? In bonds? In alternative investments?
Within your stock portfolio, how much should be U.S. versus foreign? Small-cap versus large-cap?
Within your real estate portfolio, how much do you want in income-oriented versus growth-oriented investments?
I’m a huge proponent of diversification. In fact, I diversify my real estate investments in not one or two but six different ways. I want investments spread among many cities and states, operators, and asset classes. I want my investments to mature along different timelines.
That’s part of why I invest $2,500 to $10,000 per investment. I know I won’t always hit a bull’s-eye—a few investments will inevitably underperform. But others will overperform, and most will perform around the middle of the bell curve. That distributed bell curve is exactly what I want from my returns.
That helps me sleep at night, rather than tossing and turning over that one deal I put $100,000 into that’s underperforming.
Tax Planning
There’s another type of diversification I want too: tax benefits.
Some passive real estate investments come with outstanding tax benefits. Others don’t come with any, but they come with other advantages, like stable passive income.
With my equity investments (including syndications and JV partnerships), I practice the “lazy 1031 exchange” to keep deferring my taxes indefinitely into the future.
Investments that don’t offer any tax advantages (like private notes) are often a better fit for a self-directed IRA or solo 401(k). Read up on some clever uses of your IRA for more ideas.
The bottom line: Investors who get strategic to minimize their tax burden build wealth faster because they’re leaking less money to taxes.
$0 to $1 Million in Seven Years Without a High Income
My wife is a school counselor (same salary as a teacher). I run a small business that has always been more of a passion project than a cash cow. Yet we went from starting over financially to a net worth of over $1 million in less than seven years.
We built wealth faster than most investors for many of the reasons outlined above: consistency and staying power. In particular, it helped that we lived on a tiny budget and invested such a high percentage of our income.
Those savings went toward high-return investments like stocks and passive real estate investments. We invested steadily without grinding through the side hustle of active investing.
Many investors just can’t stomach the thought of relinquishing control over their investments. So they keep building that active investing business, grinding with tenants and toilets and property managers and contractors. And they still suffer from plenty of risks outside their control, such as market risk.
I started earning better returns after easing my grip on control. That’s the price of leveraging other people’s time, but it also helps maintain that staying power of continuing to invest year after year and compounding your wealth.
And that’s how you ultimately win the investment game.
