What is passive investing? Which is the best type of passive investment for your needs and goals?
Whether it is your primary goal or not, passive investing is vital for everyone. It also carries a lot of essential perks. Yet, there are many types of investments being promoted as ‘passive’. A few are, and many are not really.
So, what are your options, and which may check the most important boxes for you?
What Is Passive Investing Vs. Active Investing?
Active investing means that you are actively involved in trading or managing an investment. Your performance and returns are directly tied to your involvement.
For example day trading stocks or flipping houses. If you aren’t online watching the ticker feed and buying and selling, or you aren’t out there swinging a hammer and unclogging toilets, you aren’t making money. You are probably losing money and putting your capital at risk.
In contrast, passive investing means that you put your capital to work, and sit back and enjoy the rewards. This may be through regular cash flow from rents or dividend payments. Or from organic or value add appreciation.
What’s So Important About Passive Investing?
If you truly enjoy the thrill of actively investing that is great. If it is fun to you, and you are making competitive returns and gains, then there is no reason that you can’t make some of your money that way. Just make sure that you can devote enough time to do it excellently. Which probably means full time, and then some.
Still, even for the most successful active investor, passive investing is just as important.
There are three main reasons for this.
One of them is taxes. Passive investment income and gains can be taxed at much lower rates than business (or active) income and gains. This can make a double-digit difference in what you net each year. Then compound those double digits every year into infinity, for future generations.
Then there are the dynamics of time and money. You can only work so many hours in a day, week and lifetime.
Even if you can make $300 an hour, every hour working, and can work 14 hours every day, 7 days a week, 52 weeks a year, you’ll only gross around $1.5M. That’s not a bad income, but it isn’t wealthy. You won’t have any time to enjoy it either.
Passive investing enables you to make more money, without having to be tied to how many hours you can work. It enables you to multiply your returns and work, and even make money in your sleep, and on vacation.
Even if you don’t have big aspirations, passive investing, and especially passive income is vital. None of us know how long we are going to be able to work, or when. Most end up retiring or being made redundant years before they plan. You don’t know if you are going to get sick or be injured tomorrow and won’t be able to work next month, for two years or the rest of your life. If you have passive income investments set up, they will go on providing for you anyway.
Types Of Passive Investments
There are many types of investments that are advertised as being passive.
This may include precious metals, cryptocurrency, publicly traded stocks, mortgage notes, and rental properties.
They can be passive. Not all will deliver cash flow and passive income. Many ends up being more than a full-time job. For example, being a hands-on landlord. That is anything but passive.
If you want truly passive investments, passive income, and capital gains, then you need to look for professionally managed investments. Those that just send you regular checks. They do all the work and deposit the returns in your bank account. Like passive real estate fund investing.