The missing element of many portfolios

Andrew Lanoie is bestselling author, investor, and podcaster at The Impatient Investor, and co-founder of Four Peaks partner.

Many who lost their jobs or found themselves in a difficult or precarious financial situation due to the pandemic in 2020 experienced a financial awakening. Caught unprepared by Covid-19, many made re-evaluating and adjusting their budget – or lack of one – a top priority. And everyone was thinking about how to protect themselves from sudden loss of income or sudden large financial loss in the future.

Many have asked themselves the exact same question: “What can I do to maintain my lifestyle and pay all my bills and expenses without sacrificing the future by immersing myself in my savings or liquidating my assets?”

The answer? Passive income.

While many suffered from financial turmoil in 2020, part of the population went on as usual financially. Of course, we’ve all been hit by the social ramifications of Covid-19, but some people have weathered the changeable financial waters better than others. “Riding the storm” would not even be an accurate description of what that sheltered part of society – the rich – experienced in 2020 as they were able to avoid the storm altogether. How? Passive income.

What is passive income?

Passive income is income that is not earned through work or does not depend on the number of hours in the day. It is the income you make, whether you work or not, whether you are sick or healthy. It does not matter. Passive income investments do not sleep. They work around the clock. Because of this, people with passive income streams – particularly streams that equal or exceeded spending – have been able to avoid much of the stress and fear of money that people without passive sources of income experience.

Passive income is often the difference between the rich and the middle class. It makes the difference between not worrying about an economic downturn or worrying about plugging holes in an unstable financial situation.

The rich have been protecting themselves against recessions for years and strengthening their financial walls with passive income. Just look at the asset allocation of one such group of ultra-rich investors: Tiger 21. For those unfamiliar with Tiger 21, this is an exclusive social investment club (at least $ 50 million in investable assets) in which the rich meet to jointly invest knowledge with one another.

If you take a closer look at the current Asset Allocation Report for the members of Tiger 21, one thing should become clear. Unlike many in the middle class who follow the 60/40 asset allocation strategy – 60% stocks / 40% bonds – those near or at the Tiger 21 level will be heavily invested in assets that have a mix of offer passive income and growth potential. Public stocks and bonds take up a small part of the pie.

Why the mix of passive income and growth?

Simply because the rich look beyond their own lives. You plan for future generations. Passive income covers current needs and can be reinvested in order to generate passive income in the long term. The appreciation of the underlying asset provides another level of wealth accumulation, public stocks and bonds do not offer an option.

No more trading time for money

Without passive income, you will always be trading time for money. In the words of Warren Buffett, “If you can’t find a way to make money while you sleep, you’ll work until you die.” Many in the middle class will trade time for money until they retire. In many cases, seniors who are financially unprepared for retirement will trade time for money long past retirement age.

A simple formula to conceptualize the effects of passive income shows what can help achieve financial independence: passive income> expenses = financial independence. You can achieve financial independence when your passive income exceeds your expenses. Why define financial freedom that way? Because unless you can quit your job and stick to your lifestyle, you are not financially independent. It doesn’t matter how much you cut your expenses. With no passive income, at some point you will still have to work to cover those expenses.

Alleviates recessions and downturns

Passive income can help mitigate the potential economic impact of recessions and unforeseen situations like the Covid-19 pandemic. Investing in recession-proof assets is particularly attractive for mitigating economic disasters. In 2020, there were certain assets and market segments that thrived during the pandemic-induced downturn. In fact, some assets thrive during any economy. Passive income generated by these assets is ideal for mitigating potential income or lifestyle losses during a recession.

Live your best life

Passive income now gives you the opportunity to live your best life. Most retirement plans are delayed gratification plans. It now tightens its belt so that it doesn’t have to suffer later. With passive income, you can stop trading time for money and buying back your time. It gives you greater freedom to quit your day job as you choose and pursue other pursuits and passions.

How to get started

There are several printed and online educational resources on the subject of passive income – many of which are focused on specific assets. These are valuable resources for new investors looking to passive investing, but in my own experience I have found that the best resource to learn about new investments is with investors who are already involved in it. Many of these investors can be found on LinkedIn and other social media investment circles, and many are happy to share their experiences and knowledge. Invest in your passive investment education and take the time to find experienced investors to maximize your willingness and opportunities.

If you want to take a day off golfing in the morning, go to lunch with your spouse in the afternoon, and play with your grandchildren in the evening, passive income can help make that happen.


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