Do Passive Investment Financial Strategies Require Less Work?

By Jeremy Sorci | April 19, 2016

"Easy money." Though some investment professionals and those in the financial media may refer to passive investing as a wealth strategy that takes less work than, say, an active investment approach, we respectfully disagree.

Jeremy Sorci is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyThough the goal of passive investing is to generate steady capital gains and an income stream over the long term from a low-maintenance portfolio, reaching that worthy outcome actually requires a significant input of time, effort, thought and research, especially at the start of the process. In fact, a successful passiveinvestment strategy takes a lot of work, specially in an economic climate that's characterized by low interest rates and volatile market conditions. Here's why passive investing shouldn't be classified as "easy money."

Mutual Funds and ETFs: Making Passive Investing a Little Easier

If you’re not proverbial with stock and bond analysis, mutual funds and ETFs can make your asset selection a little easier.  These products are essentially “baskets” of equity or fixed income securities that follow some sort of guideline, set forth by the fund manager. 

Some of these funds are passive, or, indexed.  Meaning, they simply attempt to replicate the returns of a given index by investing the underlying securities as closely as possible to the securities that make up said index. This can take the guess work out of which individual securities to select. 

A word of caution- many index funds only target a specific asset category, sector, or industry.  You’ll likely still need to do some legwork as to how to properly diversify your portfolio among these asset classes.

What Do Passive Wealth Strategies Entail?

A passive portfolio contains stable assets that result in a return without any extra work or management on your part -- over the long-term. These assets may include:

  • Stocks
  • Bonds
  • Real estate; property or investment trusts
  • Private market loans
  • Income from a business

Unless you obtain these income-generating assets through an inheritance, getting it all set up correctly requires quite a bit of work. Whether you're building a portfolio based on bonds, stocks, or real estate, you're going to have to do your research at the outset.

This initial period is known as the building stage, and it can last from seven to 10 years or more, depending on economic conditions. During the building stage, it's essential to educate yourself as to what, exactly, makes a good investment. Then you can move onto the next step: Researching and identifying which "good" assets will be most likely to keep producing for you over the long term. 

Strategic Wealth Management Takes Time

Jeremy Sorci is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyIf you incorporate real estate or business income into your portfolio, these assets may take years to actually start producing in a truly passive manner. For instance, if you rent properties, you'll still have the "active" work of dealing with tenants, leasing, advertising, keeping up with maintenance, and more. The good news is that once your properties are generating enough income that you can hire a property manager and still make a profit, you've achieved passive income. 

Similarly, business income takes a while to establish, as well. As anyone who's ever attempted to get a startup off the ground knows, the early years are anything but passive. However, once you've put in that initial work and your business has grown to the point where you can hand off the day-to-day management to someone else -- while still retaining a financial interest -- you've got  passive income.

No matter which assets you choose to invest in your portfolio, expect to also invest a significant amount of time and effort into getting that passive income stream up and running. Once you do, you can sit back and relax... a bit, anyway. You'll still need to rebalance your portfolio regularly to ensure that you're properly diversified and check up on your property management company every now and then. Overall, however, the work you put in at the beginning should help ensure that your passive portfolio will continue to generate returns without much interference.



Posted in Financial Planning, Investment Guidance