Passive income is a trending phrase amongst millennials – like the elusive Big Foot or Loch Ness Monster, finding truly passive income can be a challenge.
By definition, “passive income” is exactly what it says on the tin – income received without any active participation in its generation. However, some aspects of attaining this passive income are far less passive than they may seem.
Objective Of Passive Income
Passive income is often associated with:
- Investment portfolios.
- Buy-to-let property portfolios.
- Licensing agreements, copyrights and patents.
- Income yielding assets.
The main objective of passive income is to build up a portfolio of assets sufficient to replace earned income. This theoretically allows the investor the freedom to stop working for a living and start just living.
Projects in Passive Income
Projects regularly referred to in the passive income space are buy-to-let rental properties. An investor buys the property and receives the rent “just for owning it” – yet when you get into the nitty gritty, being a landlord is no cakewalk. There are tenants to manage and tax, fees and repairs to cover.
Something else also considered in the passive income area amongst millennials is crypto-currency mining. In theory, you set up the computers, let them run and in comes the money.
However, the rigs themselves are expensive, as is the vast amounts of electricity required to run them and the programmes can crash which may require complicated restarts that take time and money away from the investor.
Successful Passive Income
The phrase, “the old ways are the best ways”, comes to mind when looking at passive income and often the simpler the solution, the more robust it will be.
Passive income works best when it is:
- Easy to manage.
- Low volatility.
A great way to attain truly passive income would be in the public capital markets – this may be via stocks and shares, bonds, ETFs or mutual funds. Depending on your requirements and your risk profile, a blend of the above may be most suitable.
Owning real assets, sold on highly liquid markets that can be held inside advantageous tax shelters is one of the best ways to generate a passive income and maximise its benefit by protecting it against leakages like high fees and taxation.
The companies owned are managed as a going concern – meaning the management and the chief executives are actively working to make sure their company remains profitable. If they are successful, the investor can generate a positive return either via an increase in the share price or the payment of dividends.
In the case of bond investments, traditional “plain vanilla” bonds can passively pay the investor a defined interest rate – often received every 6 months.
ETFs and Mutual Funds can be bunched into the same paragraph purely due to them offering exposure to a basket of securities – this removes the need for an investor to actively select the individual constituents of their portfolios.
Public capital markets over the long term can provide consistent and easy to manage solutions to the passive income conundrum. Taking the time to find a reliable manager, financial adviser or building a bespoke portfolio can also help to bring down the day-to-day volatility.
This may not be the most cutting edge and fashionable way to build a passive income, but for the vast majority of people – it could be the most attainable.
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