“Passive” is a huge buzzword when it comes to investments, and it seems everyone is obsessed with the best ones. In this guide I’ll be going over what passive investments are, what people commonly confuse them for, and some of the most common (and best) passive investments available. If you’ve been wanting to know more about investment opportunities that let you be more hands-off, then this is the guide for you!
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’ll do my best to define it here 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 real 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.
The Myth Behind “Passive” Investments
That brings me to the distinction between myth and reality when it comes to passive investing. Most people categorize anything that you own for long periods of time as a passive investment. If that’s the case, just about everything can be considered a passive investment – from a business to rental properties. Perhaps it stems from misunderstanding the “buy and hold” terminology used in the aforementioned definition, but the distinction is important to note.
If you have an investment that requires constant, or at least frequent, maintenance and monitoring, then it likely isn’t a passive investment. The key word here is “passive” after all. The concept is straightforward, so don’t let weird jargon prevent you from fully grasping the concept – which is seemingly one of the biggest issues for people, when it comes to personal finance.
Investments That Are Not Passive
I will go over several great passive investments soon. First, I want to explain several investments that are not a form of passive investing. These types of investments are very “active” and require a lot of work. Now, that doesn’t mean they aren’t great investments. Rather, this just means that these investments take extra time and energy. Whether they’re worth the extra effort is up to you.
Real Estate
Overall, real estate is an active investment. Most people try to use real estate as an example of a great passive investment, but that’s not really fair to say. Real estate usually requires work – and a lot of it. Let’s take two of the most common real estate investments, rental properties and flipping houses, as examples.
Rental properties can be great. You can make a lot of money from them, and sometimes they don’t require backbreaking work. However, you still need to do constant maintenance on the house, do legwork to find good tenants, and cover the cost of the house when nobody is living in it. All of these factors together end up taking up a huge amount of time – and money. So, renting out a property isn’t very “passive” at all.
In the case of flipping, there can be no mistaking it. Flipping is basically a large project you work on. You do your research, tons of legwork, and you find a good deal on a property. After that, you put a bunch of money, time, and hard work into improving the property. Once that is done, you can then sell it for a profit. Even if you outsource the manual labor involved, you’ll need to be on top of things every step of the way. So, overall, it is definitely not a passive way to invest your money.
Day Trading
Day trading is messy. You’re trying to buy low and sell high throughout the span of a single day. If you didn’t know, that’s very hard. Not only that, but it’s a relatively active investment. You can’t just sit back and expect returns. Instead you need to be pursuing purchases and sales that will benefit you. If you want more information on how to time the market, then check out my article on that topic. Otherwise, even if you’re willing to try active investments, I would steer clear of this one. It is incredibly hard to actually produce good results through day trading, and you almost always lose to the long-term (passive) investors in this case.
A Business Or Side Hustle
Clearly, businesses and side hustles require a lot of work from you – especially when you’re first starting out. Let’s take the obvious example (because you’re reading one) of a blog. I used to write 1-2 articles per week, and now I do 3. That doesn’t sound like a lot, right? Well, factor in a few hours to write each article, a bit of time for revisions, formatting them for the website, including links to other articles or useful products (I only use affiliate links for products if I’m willing to use it myself), adding images, and then tweaking it to make the best use of SEO research.
Suddenly just a few articles are a fair amount of work, but still perfectly reasonable. However, once you factor in things like managing one or two social media accounts, setting up email lists, interacting with the community, and doing all the research that goes into creating my content – it ends up taking a lot of time.
Now, I like blogging. If that sounded interesting to you, I recommend trying it out – contact me and I’ll do my best to give some more information and tips on blogging. However, blogging and other side hustles or businesses definitely aren’t passive. They’re incredibly active and require a lot of consistent effort to make successful.
How To Tell If Passive Investments Are Right For You
Making decisions about your investments is something only you can do. If you like an active investment, go for it. Active investments often require a bit of knowledge before you start, so make sure you know what you’re getting into. However, passive investments are great and you should definitely get involved with them to some extent. For example, most retirement accounts and plans are prime examples of passive investing. Passive investments should definitely be a part of your portfolio. Which ones, and how you balance it with your active investments, will be up to you.
If you want to get started with passive investments, and have no clue where to start, just use Acorns. It has everything you need in order to learn how to invest and it will immediately help you start saving and investing consistently. Think of it as the training wheels for your personal finance journey.
Investments That Are passive
Now that we’ve gone over investments that certainly aren’t passive, let’s discuss ones the are. Remember, these are assets you’ll be holding for a longer time that require little or no effort on your part.
Index Funds & ETFs
Index funds and ETFs are straightforward and pretty amazing. By nature they’re diversified (to various extents) and they have a record of producing great long-term results. They’re also so easy that if you want to you can get started today. My favorite brokerage is M1 Finance. It’s easy to set up and also has a few features that make it easier on beginners. If you’re an experienced investor, Vanguard and Fidelity can also be great options.
If you don’t know what index funds are, check out my article going into detail about what they are and why they’re a good investment.
Robo-Advisors
Robo-advisors are definitely interesting. Some may even be doing moderately active trading in the stock market. The reason these are passive investments is because you can usually answer a few questions, set your goals, and then the robo-advisor will take care of it for you. This is still a new area though, with some mixed results. Overall it seems to do well enough, and can be a great option if you have no idea what you’re doing with your investments. Sometimes the management fees can be a bit too much – far greater than what index funds and ETFs would cost.
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.
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!
An Outsourced Business Or Side Hustle
Okay, I know I said businesses and side hustles aren’t passive investments – and they’re not really. 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. 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.
CDs & Bonds
Both of these are passive options that don’t require much work. At the time I’m writing the article, they don’t produce competitive returns in my opinion. If you’re more interested in them, have unusual financial circumstances, or are close to (or in) retirement, then you may want to give them a try.
Rental Properties With Outsourced Management
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.
How Passive Investments Compare To Active Investments
It’s incredibly hard to compare passive and active investments. However, I know it’s a common question and concern, so I’ll explain it a bit more. The main thing to know is that the sky can be the limit with active investments, but they can require a significant amount of effort, time, money, and knowledge to actually start. So, if you choose an active investment, make sure you know what you’re in for.
Short-Term Results
Overall, active investments, assuming they’re profitable, tend to produce better results in the near future. However, that is admittedly a big assumption. Many active investments can take a long time to actually produce a significant profit, depending on what it is. So, as far as short-term results go, if you know what you’re doing and put in the work, active investments are more likely to do better. There is no guarantee, but at the very least it is easier for many active investments to generate an income for you in the immediate future.
Long-Term
I’d say the long-term results are a little more all over the place. Passive investments can shine, particularly in the far future (putting aside outlier success stories in the short-term). Generally, over time, your investments will have increased in value drastically, especially if you’re talking about many years or even decades. Active investments can also do well though, and can be producing an income the entire time.
As I said at the beginning, they’re hard to compare. They are apples and oranges. However, it’s important to be aware of both and use them to help you reach your financial goals.
Conclusion
Remember, the key benefit of passive investments is that they are incredibly hands-off. Furthermore, they can reliably produce amazing results when you zoom out and look at how they perform when you are working with long periods of time. Active investments can be wildly successful, but they can also fail and have taken all of your time, energy, and money in the process. Of course, do your research when making financial decisions, and consider where you want to be in the long run.
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