Peter has explained exactly what to do with (his usual) stunning clarity!!! Seriously, nice job of explaining it! I have to admit the Totalmix mixer is my secret achilles heel. I can never seem to fully wrap my head around it whenever I am at client's studios working with their RME hardware. Thanks Peter, you've helped make the Totalmix signal flow easier to understand.
So, yeah back to Joe - don't be afraid of using direct monitoring. It's a great way of working (I use it my MOTU hardware.) The little I button in the Arrange Window has nothing to do with direct monitoring. All it does is leave your mic active even when you are in playback mode (ie: not record enabled).
The one thing I would add to Peter's instructions is that it's, strictly speaking, not necessary to turn off software monitoring. You could just make sure to pull down your fader all the way to the bottom when it is record enabled (so the signal getting routed to your outputs isn't doubled by being sent twice - once through the direct monitoring, and once from logic). I have my template set up this way automatically, so the faders snap down to zero whenever they are record enabled. And you can then use reverb by way of a pre fader send to an aux with a reverb plug in on it.
I personally prefer this way, but it's not better or worse; just a user preference. And if you want to use something like amp designer when you are tracking; then you can set up an aux with the input set to your physical input, and call up an amp designer there. You'll monitor with it, but it won't get printed.