Without proper financial benchmarks, you don’t know whether you are getting ahead, staying in place, or getting left behind. Therefore, it’s important to choose at least one financial benchmark on your journey to riches.

There is one consistent observation I’ve noticed in my journey towards financial freedom. Rich people make things more expensive for the rest of us. Given the supply of desirable necessities such as homes, schools, food, and even water is finite, the rich bid up prices far beyond what the middle class can afford.

With the United States Presidential election coming up on November 3, 2020, investors are wondering who will be better for the stock market: Joe Biden or Donald Trump? Let us take a look at the historical stock market performance under a Democratic or a Republican President.

Before finding out the answer, I’d like you to guess under what party do you think the S&P 500 has performed the best? From there, we can compare the reality with your beliefs.

After all, one of the keys to being a good stock investor is to remove as much bias from your investing process as possible. It is suboptimal to invest on emotion.

For example, I know several people who decided to sell a majority of their stock holdings in 2016 once Donald Trump won the election. As a result, they missed out on over 50% in S&P 500 gains.

If you are an investor, it’s important to practice taking profits to pay for a better life. If you never utilize your gains and die with too much money, you have completely lost the point of investing!

One of my favorite areas to take profits is in the stock market and convert the proceeds into real assets like real estate. This way, I increase the chances that my profits will last and provide utility for a very long time.

Practice Taking Profits To Live Your Best Life

What’s the point of investing money? To pay for a better life. I think many of us forget that investing is just a means to an end.

We set up our automatic bi-weekly investment contributions, come up with a better dollar cost averaging framework, and never touch our money because we want to grow our nest egg as large as possible. But eventually, we must spend, or else there’s really no point.

My #1 reason for saving and investing money is so that I never have to work for someone out of necessity ever again. I make this happen by building as many passive income streams as possible.

Can you imagine being in an arranged marriage (check out Indian Matchmaking on Netflix for a clue)? That’s kind of what work is like because there are always new people coming in where you had no say in their hiring. You put up with people you don’t like because you need the money. Eventually, you’ll have enough where you will make a change.

During my first two years of early retirement I was only about 75% sure I had made the right move. Therefore, I continued to live frugally and stayed disciplined with my saving and investing habits. I invested 100% of my severance check in a couple principal protected structured notes so I wouldn’t be tempted to spend any of it.

It’s been over eight years since I last worked for someone else. During this time, I’ve come to realize the fear of running out of money in retirement is completely overblown. We are adaptable and stronger than we know. If necessary, there are so many ways to make extra money.

Passive and active investing are two ways to make investment returns. Since my first job in finance, I’ve always actively invested some of my funds to chase unicorns. The question is: what is the recommended split between passive and active investing?

If you are only a passive investor, you won’t be able to outperform the market (S&P 500 or your index of choice). But at least you’ll save on fees and grow with the market. You’ll also outperform people who don’t even bother investing.

If you are an active investor, you have a chance at outperforming the market. However, the track record for outperformance isn’t that great for active investors.

We know from the data that investing in passive index funds over active funds is the way to go over the long run. No rational person would keep on investing in an active fund that regularly underperforms its benchmark.

Yet, despite the logic, active equity funds still account for about 50% of the entire assets under management of all funds. Why?

The simple reason is that a minority of active equity funds do outperform their respective benchmarks. And when they do, this creates hope. We, humans, live on hope as well as a good dose of investing FOMO.

In this post, I’d like to share my thoughts on various splits between passive and active investing. I’ll also discuss which type of person is most appropriate for each of the four splits.

Please do not confuse the percentage split between passive and active investing with the asset allocation between stocks, bonds, and other risk assets or your net worth asset allocation.

Your split between passive and active investing is part of your overall stock allocation.

The best way to get rich is to turn funny money into real assets. Funny money is money that is built upon far out assumptions that may never come true. Funny money is money you earn by just doing something you love. Sometimes people call funny money is lucky money.

By converting funny money into real assets, you help ensure that your wealth will continue to grow for a longer period of time. Otherwise, it might just go POOF one day and disappear!

Stocks As Funny Money

One of the biggest funny money assets is equities. Equity valuation is based on future earnings projections that may or may not happen. While you wait, you receive zero utility from equities. Funny money.

The first stock market meltdown I ever experienced was the 1997 Asian Financial Crisis. International college students from countries like Korea and Indonesia had to drop out because the Won and Rupiah depreciated so much, making tuition unaffordable.

Construction cranes stopped moving in Bangkok and the IMF had to bail out the entire region. Of course some people made a killing in the downturn when they swooped up assets for pennies on the dollar. But most people lost their shirts.

Then when things really started getting good again in 1999, the NASDAQ decided to collapse in the Spring of 2000. Such a shame to only experience one brilliant year of mega exuberance after college before the floor fell out.

Many people in finance lost their jobs. Then 9/11 happened. I remember seeing my stock portfolio go from $3,000 to an absurd $200,000 in six months. It then lost about $40,000 in a couple weeks when B2B stocks and internet stocks started imploding.

I remember thinking: Where does all the money go? It’s all funny money!

Paper millionaires who exercised their stock options early and didn’t sell not only lost everything, they also owed huge tax bills as well. Remember, the government always wins in the end.