Wouldn’t it be lovely to make money while you sleep? Truth be told, if you want to make a passive income and live comfortably you have to reach a point where your assets are earning money for you.
The common question asked about investing is how to get started? What are the different types of investment strategies and how do I know which one is best for me?
Like with most things in life, not all strategies are the same nor do they work for everyone. It’s important to research as there are many investment methods and some are better than others, like passive investment strategies.
Differences between active and passive investing
In simple terms, Passive investors ride the market over several years at a time while active investors prefer consistent trading in line with market trends.
Passive Investment is a straightforward investment strategy that is taught from a young age. It’s a “buy and hold” philosophy which the aim of long term security. Passive investors bet on steady market increases rather than trying to beat the market.
Active Investments are the opposite, investors choose investments based on an independent assessment of each investment’s worth — essentially, trying to choose the most attractive investments.
Investors may be able to benefit from mixing both passive and active strategies — the best of both worlds if you will — in a way that leverages the most valuable attributes of each.
Market conditions change all the time, so it often takes an informed eye to decide when and how much to skew toward passive as opposed to active investments.
Active vs. Passive: Which is better?
When starting out as an investor, it’s advisable to start with passive investments, although active investments have better rewards, passive investments have a medium risk and long term rewards.
Examples of Passive Investment Strategies
Open a Savings Account
Saving accounts are interest-bearing accounts where you can keep the money you have available but don’t need right away.
Saving accounts can be opened at the bank or any other financial institution.
Their safety and reliability make saving accounts a great way of keeping the money you want available for short-term needs.
One of the most important things to consider when opening a savings account is interest rates. Interest rates work both ways: the rates you receive on your money on deposit with the bank, and the rates you pay when borrowing via credit card or loan.
Ideally, you will find an account that pays higher-than-average interest on your deposits and charges lower-than-average interest on your debts.
Invest in Real Estate
There are different types of properties that investors can purchase, either agricultural, residential or commercial properties, and be a landlord — all online or hire a property management company to handle everything.
Airbnb is also another popular way to rent out your house, apartment, spare room, or even backyard. This is a great way to bring in a monthly income but you will need to purchase the property first to be able to do this.
Invest in a Small Business
Investing as a silent partner in a small business or startup is another way to generate passive income. This is risky, but with risk comes the potential for high returns. There are now tools available where you can loan money to a business and get paid a solid return for doing it!
Dividend stocks are stocks where regular cash dividends are those paid out of a company’s profits to the owners. When you buy stock in a company, you are essentially purchasing part ownership of a company.
In return for purchasing stock, or investing in a company you are given the right to participate in electing a board of directors to run the company and you will be paid a share of the company’s profits, at the discretion of that board.
This is paid in the form of a dividend. Consider it as a little gift for being a shareholder. Warren Buffet is a fan of dividend-paying stocks.
Peer-to-peer lending is when you loan other people money who don’t qualify for traditional financing.
There is the possibility of defaulting on the borrower’s loans from peer-lending making this a high-risk strategy.
Diversifying and investing in multiple lenders is a great way to reduce the risk.
Tips for Passive Investment Strategies:
Passive income streams require an upfront investment and a lot of nurturing in the beginning.
Diversification: It’s important to diversify your investments. Never put your money into a single stock or bond or real estate deal. Spread your investments on underlings that have no value change relationship to each other.
Liquidity: Invest only in liquid markets. For example, if you were to purchase something today, and instantly wanted to sell it, what would the loss be? If that number is low, you have a liquid market.
Risk vs Reward: (This is by far the most important, but the hardest to understand) Understand what risk/reward really is and how it relates.
As with many choices investors face, it really comes down to your personal priorities, timelines, and goals.