If we talk about financial trends in the 21st century, passive investing is one of the most popular methods of earning income.
Being a passive investor means being able to successfully invest money in a project or asset today to receive dividends tomorrow. To be more precise, counting on passive income, an investor lends his capital to a third party (group of people) for management. Passive investing excludes the investor's direct participation in the investment process, but allows him or her to act as an outside observer.
If any work requires education, knowledge and skills, then anyone can become a passive investor. As a rule, the potential income from passive investing depends on two key factors:
- the sum of the starting deposit;
- successful choice of an object for investment, i.e. strategy of capital distribution.
However, this is not all, for passive investing to bring maximum profit, it is important to know the answers to such questions:
- What is passive investing?
- What are the nuances of this type of investment?
- What strategies/directions are promising for investors?
The essence of passive investing these days
To become a passive investor, it is not enough to buy, for example, real estate to start a rental business. As a rule, it is a question of forming an investment portfolio, which will include different kinds of securities, holding which will bring income to their investor for a long period of time.
Such a principle of investment is the least energy-consuming and assumes minimal intervention on the part of the holder of capital. In other words, the investor is not required to be directly involved in the trading process. He is not forced to make regular payments, such as commissions, start-up capital replenishment, employee salaries, etc. If desired, if the terms of the passive investment agreement allow, the investor can control or simply watch his income grow and "skim the cream" in the form of dividends/interest. With a competent approach to the process and the support of professionals, the investor does not even need to conduct regular market analysis and monitor its trends personally.
What affects the returns in passive investing
Passive investing is considered effective only because it does not involve the investor in the direct management of the portfolio.
However, the main influencing factors are market mood and time.
The market behaves quite volatile, if there is an increase in quotations - this is positively reflected on the yield of securities holders. Otherwise, a kind of subsidence may be observed.
Profit depends on the choice of optimal investment instruments and proper portfolio diversification.
Many results depend on inputs such as:
- asset diversification;
- the coefficient of mutual correlation of prices, analysis of their behavior under different economic cycles;
- time, i.e. the period for which the investment is made.
A passive investor who must have sufficient time. Lack of patience is tantamount to a reduction in profits. That is, having a sufficiently long time horizon, there will be a noticeably smaller impact of market changes on the final result.
The longer the investment term, the lower the risk of an undesirable investment result. This topic can be debated, but it is difficult to argue with the statistical facts.
That is, if a diversified approach is used and there is enough time to invest for a long period of 12 months or more, a passive investment will not only preserve an investor's capital, but also multiply it.
Who is better to refuse passive investing
Despite the many positives and lack of strict requirements, passive investing may not be suitable for everyone. Below is a generalizing portrait (set of qualities) that are essential for an investor who expects to receive a passive income.
So, what is a passive investor?
- a holder of capital, ready for medium dimensional returns over the long term;
- an emotionally stable investor;
- a person who can control himself during any market fluctuations;
- a busy person who is not ready/willing to learn the theory and regularly analyze the stock market.
Do you recognize yourself? Then you are well suited for the role of a passive investor! Otherwise, it is better to reconsider your plans and analyze the prospects.
The benefits of passive investing
Is it worth the investment? Is it a positive enough prospect for the investor who is willing to invest for the sake of passive income?
Among the pluses of passive investing should be named:
- Significant time savings
Deposits work for the investor without his direct involvement, as if growing on their own while the investor is engaged in other projects or resting.
- Ability to manage personal risks
When filling the investment portfolio, the investor has the opportunity to personally manage/control his/her risks. If necessary, the investor can always refuse/replace an unprofitable asset in favor of more promising acquisitions. The investor has the right to withdraw from the market at any time.
This is important in case of negative market dynamics or for personal reasons. An investor can "cash out" his contribution whenever he wants as a result of reselling his assets.
- Low taxation
The passive investor pays minimal taxes for certain financial operations. This is possible because of the very low activity associated with his investments: as a rule, on average, a maximum of 10 transactions per year are made.
- Stable profit
When investing over the long term, the investor's financial performance rarely goes into deficit. As a rule, it is a regular, though not high, but still profit.
Cons of passive investing
Everything is clear with the advantages of passive investing, it is fair to dwell on the risks which can wait for the investor.
- The process of initial formation of the investment portfolio requires at least a basic understanding of the market or support of competent and reliable consultants. This is important for the right choice of securities.
- There are risks of unforeseen market fluctuations, as a result of which the value of the securities of the issuing company may both slightly "sink" and suddenly "fall". Bankruptcy of the investment object is not excluded.
- Relatively low level of profitability.
- Difficulties in finding reliable intermediaries.
Key passive investing strategies or let's learn earn without working
The most popular passive investor strategies in 2021 are considered to be
- "buy and hold"
- investments in indices;
- trust management methods;
- independent long-term portfolio investment.
Among investment instruments, the following stand out:
- bonds (government and corporate);
- mutual funds,
We will pay special attention to the third option.
ETF as wide opportunities for the passive investor
Exchange Traded Fund is a fund with units traded on exchanges. Transactions in ETF shares can be made throughout the trading day, because their value is influenced by the activity of market participants. This is considered a key advantage of an ETF over a mutual fund. In fact, an ETF is a new type of securities with the role of a certificate for a portfolio of stocks, bonds, etc. This type of investment is already diversified by default.
The investor is not engaged in the collection and replacement of assets in the investment portfolio - these functions are entrusted to the fund itself.
Therefore, this type of investment is considered the least risky.
To sum it up
Passive investing is the highest point among known methods of getting profit, the achievement of which is everyone's dream in the 21st century.
Before you become a successful passive investor, you should follow some simple recommendations. To maximize returns and minimize profits, it is important to choose securities from trustworthy companies, to have patience and, of course, to diversify the contents of your investment portfolio.