Passive income is not just income earned outside of your job. The real meaning of passive income is money that you earn with little to no effort.
Some may think that money earned in the stock market or from properties is passive income. Yet, this may not be the case. Stock market investors can sometimes be so caught up in trading and looking at stock prices that investing becomes a huge part of their lives and can even be considered another job. Property investing can also turn out to be tedious if you manage your properties yourself.
I know of friends who want to earn passive income but instead end up spending so much time on their investments. Don’t get me wrong. I love spending time learning and investing but this isn’t really “passive”.
Here’s how you can earn real passive income.
Stop trading the stock market
First, stop short-term trading. My definition of trading is buying stocks in the very short-term based on price action and charts. This is not investing and can become a part-time or full-time job as it requires a lot of time and effort. The more trades you need to make, the more effort is required.
We should aim to invest in a way that reduces the number of trades and amount of work that we need to do.
One way to do this is by investing long-term in set-and-forget investments. Investing in stocks that have the potential to grow earnings (and thus the share price) reliably over the long-term is one good strategy that lowers the time spent on investing.
You can also invest in passive index ETFs that track the performance of broad market indexes. Stock indexes have historically increased in value over a sufficiently long period of time and provide a good way to gain exposure to some of the biggest and most profitable companies.
You can also invest in dividend stocks that reliably pay a dividend. Investors from Singapore enjoy tax-free dividends when they invest in Singapore-listed dividend-paying stocks.
Outsource your investing
Another way to reduce time and effort spent on investing is to outsource your investing to an expert.
One way to do this is by employing financial experts who can advise you on stocks to buy or funds to purchase. You can also use robo advisors which can help you allocate your portfolio into a variety of investments.
While you will need to pay a fee for these services, having someone to invest on your behalf or advise you frees you from the hassle of doing everything yourself and saves you a ton of time.
Invest in other passive assets
You can also invest in other assets beside the stock market.
Assets such as long-term fixed deposits, government bonds, or even professionally-managed real estate may be a good way to grow your wealth without doing much work.
If you can find long-term investments that require little effort on your part but can provide a stable passive return, this is a potentially good asset to invest in and reduce your investment effort.
Know your goals
What do you really want to achieve? Do you want to grow your wealth as quickly as possible?
Then by all means go ahead and dig through annual reports, scour the market for undervalued stocks, sell weekly put options, or even manage your own AirBnB property for higher rental yields. There is nothing wrong with this and is my preferred style of investing.
But this is not passive income.
If you really want passive income, invest in long-term assets, find a professional or robo advisor to manage your wealth or build passive income by dollar cost averaging into funds or long-term assets.
While this may not always give you the best fee-adjusted returns, this is a true passive income strategy and frees up your time for other things in life.
Ultimately, when it comes to investing there is no one-size-fit-all strategy and knowing what you want to achieve can help determine how you should approach investing your spare capital (and time).
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time.