Investing to build wealth doesn’t always mean having to do a lot of work on your own, and passive investing provides a way to grow your money over time without having to monitor markets and trends daily. For some, passive investing is a stress-free way to ensure their money is working for them. This type of investment strategy comes in many forms, so let’s take a closer look at what defines a passive investment and some of the most popular choices available to diversify your portfolio.
Passive Investments Defined
Passive investing is a strategy that minimizes buying and selling to build wealth for the long term. It means less work on the part of the investor, and it tends to be less complex than some other investment strategies. Benefits can sometimes include lower fees and better tax benefits, though this depends on the investments you choose and how they are set up. This approach can be a more conservative approach to building wealth, so it’s always important to speak to a financial professional and determine your risk comfort level before making a decision on how to grow your personal portfolio.
Real Estate Investing Through REITs
Investing in rental property real estate is a passive investment option on its own, but individuals buying apartment buildings or homes for rent have to put themselves in the role of landlord. This can mean more work than you might have planned for, and REITs, or Real Estate Investment Trusts, provide a smart alternative. REITs invest in a portfolio of properties and handle the everyday maintenance, rent collection, and all other roles a landlord normally handles. You invest in shares of the REIT in exchange for having all these services taken care of every month. Passive income investment is paid out in the form of dividends, which can then be reinvested to continue a long-term growth strategy. You can learn more about the basics of REIT investing here.
Index Funds for Passive Investing
Index funds come in the form of a mutual fund or an ETF (Exchange-Traded Fund), and they are designed to follow a specific market index. The fund invests in all the companies contained within that market index, providing broad market exposure and creating an instantly diverse portfolio. The Standards & Poors 500 Index (S&P 500 for short) and the Nasdaq Composite Index are just two examples of market indexes a fund might track and follow as a guide for investments. One main benefit of investing in an index fund is that you don’t have to hold individual stocks in your portfolio, which can minimize risk and help you build a long-term strategy for growth. Index funds are also managed for you, so there’s little to do aside from keeping an eye on the fund’s performance over time. It is important to remember that an index fund is still subject to market volatility and may have limited opportunities for significant gains.
Certificates of Deposit
Certificates of deposit, or CDs, are savings accounts that hold your money for a predetermined amount of time as interest builds. Unlike some of the other passive investment options available, CDs are not tied to the stock market and are federally insured. This makes CDs a good choice for diversifying your portfolio with minimal risk. Upon the maturity date of the CD, you’ll have access to your original deposit plus the accrued interest. CD ladders can be used to create a stream of passive income, as staggered maturity dates can free up money on a monthly, quarterly, or yearly basis. These ladders consist of several CDs with varied maturity dates, where the funds are reinvested to take advantage of changing interest rates or cashed out to supplement your income. While CDs are a popular choice for passive investment, it’s important to remember that the interest rates may be relatively low, and they will not change even if inflation continues to rise.
Crowdfunding for Investors
Crowdfunding for investors is a relatively new fintech strategy, and it comes in many forms. Online peer-to-peer lending, for example, is one form of crowdfunding that lets you take the place of traditional loan providers to help fund loans and collect the interest on them. Equity crowdfunding lets you pool money with other investors to fund startups, and some REITs are even based on crowdfunding models. Each of these options provide non-accredited investors the ability to participate in unique opportunities while minimizing the size of their investment. You can learn more about accredited and non-accredited investors here. Crowdfunding platforms for investors typically have dashboards that provide you with information about your investments so you can track your progress, but they do the most of the work for you, making them suitable options for a diverse passive investment portfolio.
There’s no one right or wrong way to approach passive investing. You can use any or all of these strategies to build your portfolio, or you can look for other ways to build wealth over time. To learn more about DiversyFund and how its strategies can work with your plan for passive investing, click here.