Which Passive Investment Strategy Is Right For You?

Daniel Penzing
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Automated Financial Service

Passive income is an attractive proposition to many, but investors who are not familiar with the concept often find the abundance of options confusing.

The secret is to find a strategy that is both passive and practical.

Investment blogs often talk about strategies such as dividend investing, market timing, and selling options as passive income. While this method might work out for some, it is ill-advised for most people. Many retail investors rely on automated financial services to assist them in their investment activities. These services are accessible through a computer, smartphone, or tablet to help investors with setting their portfolio, monitoring for changes in the market, and providing investment advice.

These automated services have increased in popularity in the last couple of years because of their ability to deliver an easier way to manage investments. Some of the most common automated financial service providers are:

  • Wealthfront: Wealthfront is a California-based investment service that is designed to offer a low-cost wealth management program.
  • Personal Capital: Personal Capital is an automated investing service that focuses on investment management, portfolio tracking, and trading.
  • FutureAdvisor: FutureAdvisor has a higher investment minimum than many other services, but it still has a solid client base. The service offers future planning, asset allocation, retirement and college planning, tax optimization, and more.

DIY Investing

There are two different types of investing strategies: passive investing and active investing. With passive investing, you’re basically planning to sit back and let time do the work for you. With this type of approach, you’re letting the market do all of the work and there’s not too much that you have to do.

With active investing, you’re making day-to-day decisions in order to grow your money and achieve your investing goals. The basic approach is to research the marketplace and try to anticipate the direction of the market and its various movements. You decide when you want to invest money and when you want to take action.

The question you’ll need to ask yourself is whether you’re looking to make decisions on the fly or let passive investing do most of the work for you.

Each approach has its own strengths and weaknesses. To help you decide which direction is best for you, the following descriptions will give you a better sense of what each one involves.

Professional Management

Or Direct Investing?

It’s important for you to understand what you are trying to accomplish with your investments before you decide how to invest. As you read this, it is important to keep your definition of success forefront in your mind. For example, are you looking to have the optimal growth of capital over a 20-year time horizon? Or are you looking for a solid and steady growth over a guaranteed period of time?

The first strategy would be for you if you simply want to have a portfolio you can rely on to increase in value over time without too much concern. These funds are managed by professionals, so it’s important for you to fully understand what you are buying into.

The second strategy would be best if you are looking for a return on your investment within a specified time frame. You should probably consider investing in a managed account or mutual fund.

For example, if you have a time horizon of five years and you want to have a return on your investment during that time, you should consider investing in a managed account or mutual fund. This will allow you to take advantage of market fluctuations, but you will be putting more of the decision-making process in the hands of those who are managing your money.

Summary

There are two primary passive income streams:

  • Passive Income from Capital Growth — Investment Properties (Stocks, Bonds, Funds, etc.)
  • Passive Income from Rental Properties (Equity Rents)

There are also two primary passive income personality types:

  • Financial Mentor
  • Financial Incubator

Passive Income from Capital Growth — Investment Properties (Stocks, Bonds, Funds, etc.)

Financial Mentors invest in assets with high capital growth potential in order to create a long-lasting income stream. They spend very little time managing their investments and instead spend a significant amount of time working on their asset portfolio.

Financial Incubators invest in assets which generate income through managing a diverse set of assets across multiple asset classes. Instead of focusing primarily on capital growth, the Financial Incubator is focused on strategically generating cash flow. They seek to manage assets so that their cash flow consistently outpaces their operational expenses and loan payments.

Passive Income from Rental Properties (Equity Rents)

Financial Mentors acquire a stream of rent payments. To generate the desired cash flow, they build an operational plan and implement it with one of three business models: