Tips for setting goals as passive investors

Passive investing is a strategy that’s designed for the clear purpose of maximizing the returns that you obtain by effectively minimizing any buying and selling. In many situations, passive investments are considered to be long-term investments that you hold for a lengthy period of time before selling. For instance, it’s possible for a passive investor to make investments in art pieces.

No matter the strategy you use for making passive investments, it’s important to set goals that will guide your decision-making in the months and years to come. However, setting goals with this form of investing can be tricky when the returns are difficult to calculate. This guide offers some tips on how you can properly set goals when utilizing passive investments.

What Is Passive Investing?

This is a portfolio strategy that centers around buying and holding investments until they have appreciated in value. Because of its flexibility, there are many types of investments that can be made with this strategy. It’s common for investments to be held onto for a very long time. Keep in mind that this type of strategy hardly uses any market trading.

Likely the most common type of this investment is index investing, which centers around replicating and holding a market index or indices. The primary benefits of using this investment strategy is that it’s considerably less expensive and less complicated when compared to an active investment strategy. Additional benefits associated with passive investments include:

  • Very low fees because of much less oversight
  • Your capital gains tax should be low each year
  • It’s far easier to create an effective strategy with these investments when compared to active investments
  • Can help you diversify your portfolio

How to Properly Set Goals As a Passive Investor

When you want to make passive investments, it’s important that you understand how to properly set goals for your portfolio. If your expectations are unrealistic, you could be disappointed in the returns on your investments. While the returns that come with passive investments aren’t exceedingly high, they can help you bring in passive income and increase your wealth. Before you start implementing a passive investment strategy, take a look at the following tips that can help you along the way.

Make Sure That You Set Modest Investment Return Goals

When you engage in passive investing, your main goal should be to obtain modest investment returns. In fact, you should rarely expect to get high returns that beat the market. While this form of investment comes with much less risk than the majority of active investments, it’s important to understand that the returns are generally random. Even though the returns for passive property investments are somewhat predictable, not all passive opportunities can be calculated beforehand. If you set modest investment return goals, you’re portfolio should be able to withstand a slightly worse return than you expected.

Use the Right Strategy

There are many different types of passive income investments that you can make, the primary of which include real estate, dividend stocks, index funds, and peer-to-peer lending. The strategy that you choose depends largely on your preference and your knowledge of the investment in question. Real estate investments are very popular because of the ongoing rise in property values that has occurred in most locations over the past 10 years. If you want to obtain long-term returns that you can count on, this shouldn’t be a bad investment.

If you invest your money into real estate for the purpose of bringing in passive income, you can gain ongoing income source from rental properties. You could also invest in REITs, which are designed to pay out around 90 percent of taxable income to investors as dividends. Crowdfunding is another great option that gives you the full tax benefits of being a property owner.

If you’re not interested in making investments in properties, you could look into dividend stocks, which are an easy way to generate income. When public companies earn profits, these profits are sent to investors as dividends. You could then choose to purchase additional shares with dividends or cash out. Keep in mind that the yields that can be obtained with dividend stocks vary with each company. Consider searching for companies that are classified as dividend aristocrats, which indicates that significant dividends have been paid out for at least 25 years.

As touched upon previously, among the more popular types of passive investments are index funds, which are mutual funds that are linked to a market index. Index funds are passively managed and won’t change significantly unless the underlying structure of the index changes. Management costs are very low with index funds. The fourth type of passive investment strategy that you should consider is peer-to-peer lending, which is also known as crowdfunding. Currently, crowdfunding is highly popular and is used for everything from buying properties to funding different types of loans.

Crowdfunding involves numerous investors lending money to a business entity or person via an online platform that connects the borrowers and lenders. These platforms include Lending Club and Prosper. Aside from funding the actual loan, you aren’t required to do much in regards to managing the fund. You can expect a return that ranges from 6-12 percent when making crowdfunding investments, which can help you with your wealth building efforts.

Each of the four aforementioned strategies has its own positives and negatives that you will need to take into account. With the right approach, all four options can provide you with sizable returns that you can use to increase your wealth or to open up additional investment opportunities. The goals that you make can be dictated by the strategy you choose.

Identify How Much Money You Should Save

Whether you want to make passive investments to bolster your wealth building efforts or to increase the amount of money that you have for retirement, it’s important that you set a goal for the total amount of money that you want to earn and save from your investments. When saving for retirement, it’s recommended that you set aside enough money to cover 70-85 percent of the income that you bring in before retirement.

If you want to travel the world upon retirement or invest in a new hobby, your savings may need to be even higher. Other investment firms recommend that you save around 10 times the amount of income you generate in a single year by the time that you turn 67. If you earn $100,000 per year, this means that you should have around $1 million in savings by the time that you’re 67. Once you know how much you want to save, you will have a better idea of what your goals should be.

Know How to Overcome Investment Hurdles

There will always be hurdles and challenges that you will be required to overcome when making passive investments. If you want to reach the goals that you set for your investments, it’s important that you know how to overcome any challenges that you face. Even though passive investments are less risky than active ones, it’s still possible to lose money on your investments. Keep in mind that this type of investment is meant to be a long-term strategy, which means that you will want to sell your investments when they have reached an acceptable value that will allow you to generate a sizable return.

Along the way, you may notice that the investment dips in value at one time or another. Some investors will panic in these situations and choose to sell, which is typically a bad idea. Passive investments aren’t meant to fluctuate substantially in value, which is why you should be patient while awaiting favorable returns. The key to a successful investment is to react to volatility in the markets with a calm and measured approach.

Set a Clear Timeline With Each Investment

It’s highly recommended that you set a clear timeline with the goals that you have for each investment. If you want to net a return of 10 percent after 10 years of holding an investment, you should stick close to the timeline that you’ve set. By creating a clear timeline, it should be easier for you to avoid selling too early or to hold on too long while you await higher returns. Keep in mind that the right passive investments can be held until well after retirement age. If you set these timelines as early in your life as possible, it’s more likely that you will earn enough income to reach your goals.

If you want to be a successful investor, making passive investments is a great way to diversify your portfolio. Most of these investments are simple and easy to manage, which helps to reduce overall risk. Though goals aren’t always easy to define with passive investments, setting some basic ones should help you avoid making costly mistakes when you invest your money. With patience, the income that you generate could be higher than anticipated.

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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Joe Fairless