Passive Income: A true form of wealth

Mr. Darcy of Jane Austen’s Pride and Prejudice is described as having 10,000 pounds a year, and his friend Mr. Bingley is said to have “four or five thousand a year.” These would be massive fortunes both for the time and now once adjusted for inflation. More interesting to the financial investor, however, they also represent a different way of thinking about wealth.
Rather than being expressed as net-worth calculations that are commonly used today, both Darcy’s and Bingley’s fortune are given in terms of annual passive income. Darcy’s investments and real estate bring in £10,000 each year and Bingley’s a little under half of that. Nowhere in the novel is either person’s actual net worth given.
While there are reasons why net-worth calculations are used more than annual incomes to describe wealth, the shift from the passive-income mindset to the net-worth one isn’t entirely helpful.

The Stock Market and the Net-Worth Mindset
Historically speaking, the growth of net-worth thinking is caught up with the establishment of the modern stock market and similar investments that allow for market-to-market comparisons.
While Darcy and Bingley could’ve had bankers exchanging East India Trading stocks for them in London, they couldn’t trade or liquidate assets as quickly as stocks can be sold now — especially since substantial amounts of their fortunes were caught up in real estate that generated rent from tenants.
It’s only because we can now liquidate assets like stocks, mutual funds and bonds at the click of a button that thinking in terms of net-worth is really possible. Austen never mentions net-worth because the reality was that Darcy and Bingley couldn’t liquidate their assets quickly or easily.

The Differences Between Net-Worth and Passive-Income Thinking
While liquidity is helpful in certain situations and you’d want some assets in liquid investments, the shift in focus from passive income to net worth isn’t entirely helpful.
For one, a net-worth focus sometimes keeps people from using their wealth the way they’d like to. For example, parents may track their net worth during their working years in order to save for a nice retirement — only to find that they wish they used their wealth more when their children were home. The exact ways people fail to fully utilize their wealth vary, but most of us at times neglect to fully utilize what we have. The distributions that passive income can generate let investors use funds now or reinvest them as is appropriate for their situation.

Additionally, focusing on net worth to the exclusion of annual passive income often leads people who do want to save for a future day to make unwise investment decisions. For instance, investors don’t always remember that:

  • Net-worth is often a relative (as opposed to absolute) calculation that can be volatile and cause people to make decisions based on emotions rather than data
  • Projected return analysis normally don’t take into account reinvesting passive income, which may generate higher returns than a basic IRR or XIRR analysis shows
  • Passive income can serve as a risk mitigant by providing regular returns rather than only giving income during liquidation
  • Alternative investments that generate passive income frequently provide tax benefits that non-passive investments can’t

 

Building True Wealth with Passive Income
Building wealth like that of Mr. Darcy and Mr. Bingley requires not only reconsidering investments, but investors must re-examine what wealth itself is. Instead of focusing only on net-worth calculations that ultimately are little more than numbers on paper, true wealth is a call to investing in ways that give you freedom to live, reinvest and enjoy life the way you’d like to.

To learn more about building wealth in the modern era through passive income, reach out to the professionals at Marcus Investments. The Marcus family has been helping people build true wealth for nearly 85 years, and they’d welcome your partnership with the firm.

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