Imagine this: you buy apple seeds, put them in the ground, and without any watering or care, you get a full-grown, fruit-filled tree a few years later. Sounds great right? A small investment leads to a fruitful (pun intended) result. Now, that’s what passive investing is all about.
If you want to invest but without the hassle of running a business or having daily responsibilities, passive investing can be your kind of investing. You’ll get to live your life and let the money grow by itself. You can actually be making money while you sleep.
So, are you interested in how you can improve the situation on your bank account with very little effort on your behalf? I know I was intrigued when I first heard of this money-growing opportunity.
Let’s talk some more about what passive investing is all about.
Passive Investing….What?
This may be your first reaction. What kind of investment can be passive? How can this be true? Well, if people can mimic singing on TikTok and be famous for it, why can’t passive investing be real?
All TikTok jokes aside, here’s what passive investing is.
Passive investing is investing in diversified assets that generate passive income. The key part of passive investing is not selling the assets. The goal is to hold the assets long-term, allowing them to build your funds without your interference through reinvesting dividends and compounding interest earned. That’s why passive investing is also known as the buy-and-hold strategy.
Why the word passive? Because you don’t need to keep an eye on your investment. When you choose the right investment, you can put the money into it and move on. Live your best life. Work on your career. In any case, passive investments won’t be bothering you.
Index investing is one of the most popular forms of passive investing. Perhaps you’ve heard of it. So, let’s take the example of index investing to further explain how all of this works.
With index investing your money is used to buy shares in a group of companies. This group of companies is called an index. If these companies collectively do well, so will the index. Thus, your money will grow. This is, in my experience, the best way to invest money – I would prefer to pay the index fund manager a small percentage of my investment to have his/her team of experts work on earning me money, rather than save 0.5% but make no (or even lose) money.
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The Good and the Bad Sides of Passive Investing
Like everything in this life, passive investing also has its positive and negative aspects. If you do plan to get involved in this ordeal, you should be aware of them both.
To understand passive investment truly, you need to objectively assess its benefits and drawbacks.
So, put aside the enthusiasm triggered by the thought of earning money without any work. Consider the following good and bad sides of passive investing before you decide whether it is the right thing for you to do.
Good sides of passive investing:
- Simple investment strategy (there’s no need for extensive research)
- Cheaper than active investing
- No need for managing assets
- Lower fees and operating costs compared to active investing
- No need for hiring an active manager for your investments (index funds are different as there is a manager managing the fund, rather than just your portfolio of investments).
Bad sides of passive investing:
- Subject to market risks
- No instant returns
- Limitation to a predetermined set of investments
The Best Passive Investing Strategies for 2021
If you’re intrigued with everything I’ve mentioned so far, let’s go deeper inside the story. Now that you know WHAT passive investing is, we need to cover HOW you can invest passively. This brings us to passive investing strategies.
The strategies you’ll read about are proven to yield decent and in some cases very high returns. But, since life isn’t a fairytale, you should be aware that investments with high return potential do carry some risk.
So, take your risk tolerance into consideration. If you’re not “without risk there is no gain” type of person, that’s okay. You can always go for low-risk methods of passive investing.
That’s about it when it comes to the introduction of passive investing strategies. It is time for the real deal, that is, the strategies themselves. Here are some of the best passive investing strategies for thriving investors.
1. ETF (Exchange Traded Funds)
ETF is a collection of stocks, bonds, or other assets that trade as a package. They act as a single stock on a stock exchange. It’s like when Power Rangers transform into a Megazord, that’s how a range of stocks or bonds transform into an ETF. This diversification leads to a lower risk because you aren’t dependent on the performance of a single stock.
2. REIT (Real Estate Investment Trust)
REIT is a company that owns and operates real estate or real estate-related assets. REIT allows you to own a portion of property by buying into that REIT’s unit. So, if you want to earn from property without the hassle with the tenants and property maintenance, REIT may be just the thing for you.
3. Dividend-paying stocks
Some companies choose to pay some of their net income directly to the shareholders and that is in the form of dividends. The more shares you own in a dividend-paying company will result in more dividends being paid to you. However, this is usually at the trade-off of share growth.
The average return of dividend-paying stocks depends on the stock you want to buy but you can expect it to mirror the market performance. The best tactic is to buy into dividend-paying stocks when the share price has gone down. That means that the dividend yield has gone up simultaneously and you can lock in your purchase in a really high yield.
Who Says that Passivity Can’t Earn Money?
Passive investing allows you to sit back and let the money work for you. If this arrangement seems something that fits your style, go for it. Now you know the basics – you can make informed decisions.
But before you dive headfirst into passive investing, go digging for promising opportunities. A little action is a must before you can put your legs up and let your passive investment do the rest.