The dream of passive investing is to build a portfolio so that you no longer have to do anything active to get a steady return. But it takes some work to make it come true, especially now when interest rates are low and markets are volatile.
The goal is to find the kind of stable assets that will eventually do all the work of earning money for you. When you have investments that do this without doing anything "extra," the income is known as passive.
Assets in a passive investment portfolio might include real estate (real property or real estate investment trusts), P2P (person-to-person private market) loan, dividend-paying stocks, bonds, or even interest in a business.
How can you set up a portfolio that works for you over the long term? Hard work, for starters.
Active at the start, passive later
The reality is that most passive investment income (unless you received the income-producing assets via inheritance) requires a lot of active work at the outset. If you are building dividend portfolio, investing in bonds, or creating a revenue stream based on P2P loans, you need to do a great deal of research when you start.
It's important to understand what makes an asset a good investment, as well as identify assets that are likely to keep producing on your behalf going forward. The research and time spent, as well as the knowledge needed to successfully build your income portfolio over time, can result in a great deal of work during the "building" stage, which can last seven to 10 years -- or even longer.
When you invest in real estate or start a business, the "passive" portion of your portfolio can take years to produce income. If you have rental properties, or if you lease commercial real estate to businesses, you might have to deal with the stress and work that comes with managing your properties. Maintenance, tenant screening and other duties take time and effort.
Only when your real estate is producing enough income that you can use it to hire a property management company -- and still have some left over for your own use -- can you truly say your real property represents passive income.
Business investments take time
The same is true of starting a business. While you might hope to pass the running of the business on to someone else while still retaining an interest in the company, the initial years of a startup are about as active as anything.
There is no way to avoid that reality if you are building your own business. Only later, after you've made your investment efforts active and built up your portfolio, can you sit back and enjoy the fruits of your labors. It's important to realize that building a passive investment portfolio is actually a very active process. That income only becomes passive later, after you've created a firm foundation and build your portfolio to the point where the assets in it are capable of generating returns without a lot of interference from you.
Minimal involvement with your passive portfolio
Of course, even when you do get to the point that your portfolio can pretty much generate your desired income, you still need to remain somewhat involved. This is true not only for business investments but for income-producing securities. You might need to occasionally rebalance your passive portfolio, sell losing assets and buy undervalued assets. A couple times a year, it makes sense to check with your property management company and make sure it is doing a good job.
You might want to sit on the board of that business to protect your interests, even if you aren't actively involved in the day-to-day operations of the company. Passive investments, although they might eventually need only a few hours of thought each year, shouldn't be completely neglected. If you ignore those passive investments, eventually they'll stop producing as efficiently, and you could see your income dwindle.
Miranda Marquit is a freelance financial journalist. She writes about beginning investing, low cost index funds and dividend stocks for a variety of financial websites. Her own blog is Planting Money.
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