Everyone is obsessed with the idea of passive investments, and are always looking out for the best ones. While not every investment is a truly “passive” one, I’ve done my best to come up with a list of 10 of the best passive investments. Which ones are better than the others will depend entirely on your personal situation and long-term goals. Without further ado, let’s dive right in!
What Are Passive Investments?
A lot of people have different definitions for passive investments. Many of those definitions, quite frankly, turn out to be inaccurate. I’ve done my best to define it previously, in a way that is easy to understand.
First off, another common name for passive investing is the buy and hold strategy. With this you’re basically just buying an asset and sitting on it for an extended period of time. This may be a bit of an oversimplification, but it’s one of the best definitions and it’s easy to understand (after all, the jargon in personal finance can be a bit much). Many people assume passive investing is exceptionally slow though, and that isn’t necessarily the case. Passive investing can work relatively fast, depending on your goals and starting capital. However, passive investing certainly isn’t something you should expect overnight results with.
The core takeaway with passive investing is that it is very much a “hands-off” approach to investing. With passive investments you really shouldn’t have frequent tasks or maintenance you need to do for it.
1. Index Funds
Index funds are one of the best passive investments. In fact, I’ve written a guide to help you get started investing in index funds. Time and time again, I will always come back to them. They are, without debate, a fantastic option for those opting for a long-term strategy. Find some of the best performers, invest and diversify, then watch as your money grows with the market!
This growth is hard to beat, and passive index fund investors beat the majority of day traders over the long run. When in doubt, this is a simple go-to option that everyone can benefit from.
2. REITs
A real estate investment trust is basically one of the only types of real estate investments that can actually be considered passive. It works a lot like stocks, and it can provide a source of income as well as an increase in value over time. All-in-all, they’re a decent investment, and I personally like using them in my portfolio to add a little diversity. One caveat is the tax burden they may place on you. Look into that. You may decide that it’s better for you to invest in them through a tax-advantaged account like a Roth IRA.
3. An Outsourced Business
I want to start this off by saying that I generally wouldn’t label a business as a passive investment. However, if you are able to outsource all of the work, or be a silent partner, it is possible for it to become passive. This probably isn’t the most common case, but you could always work towards outsourcing aspects of your business to make your future retirement more achievable – turning it into a passive investment. I will add that outsourcing the work will likely eat at your profits, but that may be worthwhile for the extra time you’ll get back. It’s not an option for everyone, but it’s certainly nice if you have the opportunity to use it.
4. Dividend Stocks
These are similar to REITs, but more traditional. They give you dividends, which can provide an income, and they can also increase in value over time. Some people swear by investing in dividend-producing stocks, others find them to be disappointing. Do your own research and decide if they’re for you. Even if you don’t love them, you may decide you want a bit of them in your portfolio!
5. Peer-To-Peer Lending
This is pretty much what it sounds like. You can borrow, or lend, money without having to go through a bank. It’s possible to lose your money through this, but many people tend to have overall high returns. It’s a bit risky, but something that is worth looking into nonetheless.
6. CDs
Certificates of deposits are often misunderstood. Keep it simple. They’re essentially a savings account, but you can’t withdraw from it (without penalties) for a set period of time. These time periods are usually somewhere between 6 months and 5 years. They’re similar to a savings account, but not as available – fortunately, they usually offer higher interest rates. More recently, CDs haven’t always been worth it. However, they go in and out of fashion. Pay attention to rate changes as time passes, as these may become an amazing passive investment for the short-term.
7. Bonds
This is another decent passive investment. It doesn’t have the growth of index funds, but it can still outperform savings accounts and (sometimes) CDs. The main use for them is to diversify your portfolio and lessen the blow when the market has downturns. If you’re nearing retirement age, you may decide to put more of your investments into bonds rather than index funds, ETFs, or individual stocks. It’s not necessarily a great way to build wealth, but it still has uses.
8. Outsourced Rental Properties
So, like a business, you can outsource the work required to manage rental properties. This will definitely cut your profits by a huge margin, but it may be worth it. It comes down to whether you can remain profitable, and if the time saved makes it worthwhile for you. Real estate, as a general rule, isn’t much of a passive investment. Fortunately, you have options like this and REITs to include real estate in your portfolio – while keeping the investments hands-off.
9. ETFs
ETFs are a lot like index funds. I’m not going to get into the nitty gritty here, just know that they’re amazing for long-term growth – again, just like index funds. As long as you pick good performers, with low fees, you’re bound to do fairly well. If you want to start investing in ETFs, index funds, or even individual stocks, then sign up for M1 Finance. They make the investment process easy – building a portfolio and automating investments has never been simpler.
10. High-Yield Savings
High-yield savings aren’t exactly a great “investment” – but it’s easy access when you need to pull your money out. Build up an emergency fund and put it in a high-yield savings account. The earnings won’t keep up with inflation, but it’s something. Better yet, it’s there for you in emergencies and lets you take more risks with other investments. For a bank with good savings accounts, check out Axos.
Conclusion
If you think I forgot an important passive investment, let me know in the comments. Better yet, let us know what your favorite assets are to invest in! For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter.
