The Difference Between Active Investing and Passive Investing
One is more likely to make you rich
I think few people would dispute that investors are among those who make the most money in the world.
For the stoic investors, wealth is amassed over decades. Those with a more epicurean mindset, however, may want to make money more quickly.
Robert Kiyosaki, the author of the classic book “Rich Dad Poor Dad,” educated a world of budding investors about what he termed the “Cashflow Quadrant.” In a nutshell, it explains how people who become wealthy investors typically progress from employment to self-employment to becoming an investor.
You might be wondering, how do active and passive investing play a role in wealth creation?
Active vs Passive Investing
Let’s begin by reminding ourselves of the definition of each term.
Active investing means that you take a proactive approach to investment. You’ll be making investments and checking on them every day to build your wealth. A prime example of this is penny stock investing.
Passive investing is the opposite. It’s very much a set and forget affair. You make your investments then simply watch the dollars roll in. Sounds like a no brainer which one you should go for, right?
If it really was that simple, maybe. But there’s a little more to it.
The Problem with Passive Investing
Making money while you sleep may be nice, but the caveat is that you have no control over the asset.
Examples of passive investments are things like stocks and real estate if you outsource property management.
You have no control over the stock or real estate market, so how much you earn depends entirely on what’s happening in the market at any given time. While this may sound risky, it isn’t. When you invest in a stock or a house, you get a small piece of a large pie. By distributing your investments, you reduce the risk as all your funds aren’t reliant on one asset performing well.
With a smaller piece of a pie, you get smaller returns. Passive investing is, for the most part, a long-term game. You trade speed for reduced risk.
Should You Go Active Instead?
With active investing, you have far more control over your returns since you manage your asset.
For example, if you bought an eCommerce business, you would gain control over every aspect of the business. If you bought a stock share of an eCommerce business, on the other hand, you would have little to no influence over how the business is run.
That means that with an active investment, you’re in charge of growth. While market conditions could, and probably will, have an impact on your business, you still have the ability to navigate those market shifts with business growth and management strategies.
The returns you receive on your investment will be directly correlated with your skills or with your ability to build a team to run your business for you.
Since you have control over the growth of your business or asset, there is an opportunity to make an aggressive return on investment (ROI).
Stock market investments have, on average, a 7–8% return rate. It’s not uncommon in the online business investing space for investors to see returns in the triple digits. We’ve seen it happen on our marketplace.
The beauty of investing in online businesses is that even if you decide to go passive, the returns are still far better than stock investing.
For example, if you buy an affiliate site for $100,000 that makes around $3,000 per month in net profit, that means you’re making $36,000 annually. That is a 36% cash on cash return if you did absolutely nothing with the business other than maintaining it.
If you decided to grow the business by yourself or by hiring a team to do it for you, you could tweak the asset, by, for example, adding display ads, doing conversion rate optimization, building an email list for marketing, etc., and you could see a 20–50% lift in net profit. At a 20% lift, you’re making $3,600 a month or $43,200 annually, which is a 43.2% cash on cash return. We’ve conducted case studies on online business investments and have actually seen investors make these sorts of returns.
You’d be hard pressed to find any traditional investment that can churn out these kinds of numbers.
Risk and Reward
While active investing can offer much higher returns than passive investing, it is also far riskier.
Which way do you go, then?
It depends on your investment goals; whether you want a quick ROI or you’re willing to wait and play it safe.
It also depends on your current situation. If you have enough capital and the skills needed to grow an asset like an online business, then an active investment strategy could be right for you.
However, if you don’t have the skills or the time to actively grow an asset and you do not have enough capital to take on high-risk investments, then you’re probably better off going down the passive investment route.
Regardless of your chosen investment path, you should never invest in something you can’t financially manage to lose. All investing comes with a risk of losing everything.
The Best Way to Get Started with Active Investing
Everybody wants the highest amount of return in the shortest amount of time.
Based on our experience brokering hundreds of online business deals and watching how they perform as investments after the purchase, we believe that the best way to get into active investment is to purchase an online business.
There are many reasons for this, but most importantly, online businesses offer immediate high profits and cash-on-cash return potential that are not found in many other places.
The only barrier to this immense wealth builder is acquiring the knowledge necessary to get into this space. That said, once you understand the fundamentals of online business investing, you have access to brokers, like us, who offer free personal advice from online business experts who are on the bleeding edge of the online business investing market.
If you’re interested, you can schedule a free call with one of our Business Analysts who can help you create a goal framework and build personalized buying criteria that makes sense for where you are on your journey.
