- Passive investing is a long-term wealth-building strategy.
- This investment approach is directly opposite of the common active investing, where investors aim at getting profit from short-term goals derived from buying and selling of goods.
Have you ever thought of how life would be if you did not have to worry about how you shall make or multiply your money? How would it feel if you found out that someone else’s job is to ensure that you get very high risk adjusted returns?
Passive investing is a long-term wealth-building strategy. This investment approach is directly opposite of the common active investing, where investors aim at getting profit from short-term goals derived from buying and selling of goods.
The same way you do not have to study medicine to be healthy or you do not have to read the entire Bible or Quran all the time for spiritual nourishment, investment matters gives a platform where one can also take advantage of the available investment options in the market that will help you relax as your money works for you.
This is in line with author Manoj Arora’s thinking in the book From the Rat Race to Financial Freedom’. He says “Money has the power to buy you things. But a much bigger power of money is in generating more money for you. Those who are able to manifest the latter are never short of it.”
Understanding what these options are and making the right choices makes a whole difference. While making investments, it is good to understand the expected returns from each type of investment.
WHAT KINDS OF RETURNS CAN AN INVESTOR LEVERAGE ON FROM DIFFERENT ASSET CLASSES?
Equities: The main aim is to buy stocks that shall appreciate in value and make long term capital gains or buy stocks with a good history of paying dividends or whose dividend potential is high.
The investor should be willing to be in the investment for at least three to five years as the returns can be pretty volatile. This is not good for money meant for fixed expenses like school fees or rent.
Fixed income investments: As the name suggests, the returns are known upfront and for the certainty that one gets the returns are generally not very high. One can easily liquidate their investments and their capital is protected.
Real estate: The purchase of completed buildings for rental income and capital appreciation helps create a stable income that is growing year over year.
Pooled funds: Diversification is key. The best way to benefit from this is through indirect investments as it helps bring together different people under the roof of a professional fund manager. It is good to make the right choice of funds to ensure the risk return expectations are met. For example, one should not be looking for certainty and invest in an equity fund.
Direct investments in businesses: One can choose to be a silent partner or investor in some businesses. The risk levels are high since in most cases, these kinds of investments are not formal and people may take advantage of the providers of capital.
The key here is to understand what you are investing in through drafting the right documents so that you have recourse in case the investments don’t work out due to factors that could have been avoided.
HOW CAN ONE MAXIMISE THEIR PASSIVE INCOME?
Create the right portfolio: One should create a portfolio guided by the investment goal. You can segregate your portfolio to fit various goals. For example, cash for short term goals such as school fees should be placed in a relatively liquid asset while money for long term goals such as retirement should be in higher returning long term assets like shares and real estate.
Spend time and learn: Prior to taking any form of investment, one needs to learn as much as possible. However, starting an investment option that you do not understand could be disastrous as one would end up losing money which in turn drives you much further from your goal.
Start as soon as you can and experience the magic of compounding. The time value of money leads the portfolio to experiencing significant growth and the longer the investment horizon, the better it is for the investor.
Reduce trading activity: The more you trade the more you lose in terms of transaction costs and taxation. When you realise your capital gains then you have to pay the capital gains tax that comes with it.
Select the right partner: It is of paramount importance to invest in long-term relationship and having an investment partner who is going to walk the financial journey with you.
Similar to other aspects of life, having a clear map to your investment destination is essential. Therefore, it is important to speak to someone who has been on an investment journey to get a few tips and his or her experience on its benefits. Whether in career and business, having an accountability partner also helps create the discipline of investing and maximising returns.
Hence, you might want to look for a financial adviser who shall walk with you through the investment journey.
In the end, the ultimate goal of passive investing is to gradually build wealth, as opposed to make quick cash.