More and more Americans are learning how to gain financial independence and retire early. This community, also known as FIRE, earn wealth by relying on the principles of passive investing.
Passive investing can work wonders for your portfolio goals if you have a sound strategy in place. Check out this guide to getting started as a passive investor.
What Is Passive Investing?
Passive investing is the strategy of buying and holding an investment over the long term. The term ‘passive’ refers to the fact that investors don’t buy and sell often, but it also can mean that there’s no active fund manager.
Passive stock investors use what’s called a buy and hold strategy to gradually build their portfolios. They’re different than active traders who track stock prices to decide when to buy or sell.
Short term investors usually make trades daily, weekly, or when stocks hit certain price points. While this method works for some, passive investors aim toward a more conservative way to make money.
The principle behind letting your money grow untouched comes from the idea that no one can ever outperform the market. Another common investor rule is that no one should ever try to time the market.
You can never really know whether stock prices will go up or down because stock pricing is irrational. Investors decide to buy and sell for many emotional reasons including fear, greed or sensational news stories.
The financial independence community looks for the cheapest way to earn money for an early retirement. There is a range of passive investing products that help investors reach this goal.
Types of Passive Investments
One of the most common types of passive investments is an index fund. Index funds track specific markets like the S&P 500 or sometimes the total U.S. stock market.
They are a kind of mutual fund or exchange-traded fund (ETF). Choose an index fund to get the best deal on fees while still getting the same market returns as traditional mutual funds.
Unlike traditional mutual funds, index funds aren’t managed by a person. This is how investors avoid paying high operating expenses on their brokerage accounts.
No active manager means less overhead. But this does put the burden on the investor to decide which markets they want to track.
The broader your investment mix, the less likely you are to lose money long term. But this can also mean missing out on large gains made by trendy industries like tech.
How Much Do I Need to Invest?
Index funds are very low-cost investments. Some brokerage houses allow you to buy fractional shares or partial shares in the fund.
This makes index fund investing affordable for everyone no matter the amount you have starting out. But there are minimum investing amounts set by certain brokerage accounts.
Similar to bank accounts, brokerage accounts come with perks for people who open accounts and deposit large balances right away. You might qualify for a cash trading bonus or have fees waived for a certain period of time.
There are options for accounts with no minimum opening or trading balance. The upside to index investing is that even if you don’t qualify to invest in a popular fund, there’s usually another similar fund available that’s within your price range.
Can I Invest Passively in Real Estate?
Passive investments don’t just apply to stocks. You can invest in property using services like Delaware Statutory Trust and avoid the terrible T’s–tenants, taxes, trash, and termites.
Passive real estate investing is attractive especially once you get closer to retirement. You’ll want less people management and more financial rewards.
Another way to become a passive real estate investor is to get accredited. Accredited investors have access to large investments or property syndication.
As an accredited investor, you receive offers to partner with other investors on large scale projects like oil rigs or shopping centers. Accredited investors must meet certain criteria in order to participate in these kinds of deals.
Here are the requirements set by the SEC for becoming an accredited investor:
- Have a Net worth of $1-million or more
- Have more than $200,000 in earned income for the year
- Have more than $300,000 in earned income if combined with a spouse
Even if you meet one or all of these requirements, you must be able to prove you can continue to meet them for at least three years. This rule is to protect investors from deals that can potentially bankrupt them.
If you choose to pursue smaller real estate investment deals, it’s possible to have partially passive investments that require less effort than being a landlord. One possibility is hiring a property manager.
You’ll need to manage the property manager, but it keeps you at arm’s length from the day to day concerns of your tenants.
Is Passive Investing Right for Me?
Passive investing is best to pursue once you have clear investment goals in mind. Not every strategy will make sense for every income level.
It’s also important to keep in mind that passive investing is only passive after you’ve educated yourself on the process. For example, you need to learn the rules of real estate syndication before getting started with your first investment.
Making the wrong move with the SEC could result in hefty fines, or in extreme cases, prison time. Since passive investing is a long game, you have time to get your strategies in place in a way that’s legal and lucrative.
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