d
Follow us
  >  Real Estate   >  The Missing Element Of Many Portfolios

The Missing Element Of Many Portfolios

Andrew Lanoie is a Best Selling Author, Investor and Podcaster at The Impatient Investor, as well as Co-Founder of Four Peaks Partners.

Many who lost their jobs or found themselves in dire or precarious financial situations in 2020 due to the pandemic had a financial awakening. Caught unprepared by Covid-19, many made reassessing and adjusting their financial plan — or lack of one — a top priority. And on top of everyone’s minds was how to protect themselves in the future from a sudden stoppage of income or sudden major financial loss.  

Many were asking this very question, “What can I do to maintain my lifestyle and meet all my bills and expenses without sacrificing the future by dipping into my savings or liquidating my assets?” 

The answer? Passive income.

While many suffered through financial turmoil in 2020, a segment of the population went on with life as usual, financially. Of course, we were all affected by the social effects of Covid-19, but some people navigated the choppy financial waters better than others. “Riding out the storm” would not even be an accurate description of what this sheltered segment of society — the wealthy — experienced in 2020 since they were able to avoid the storm altogether. How? Passive income.

What Is Passive Income?

Passive income is income that is not generated from labor or doesn’t depend on the number of hours in the day. It’s the income you make whether you’re working or not or whether you’re sick or well. It doesn’t matter. Passive income investments don’t sleep. They work 24-7. That’s why people who had passive income streams — especially streams that equaled or exceeded expenses — were able to avoid much of the stress and anxiety over money experienced by those with no passive income streams. 

Passive income is often the difference between the rich and the middle class. It’s the difference between not worrying about an economic downturn and scrambling to plug holes in an unstable financial situation.  

The rich have been hedging against recessions and fortifying their financial walls with passive income for years. Just look at the asset allocation of one such group of ultra-wealthy investors: Tiger 21. For those unfamiliar with Tiger 21, it’s an exclusive social investing club (minimum $50 million of investable assets to join) where the rich get together to share investing insights with one another.  

If you scrutinize the latest asset allocation report for the members of Tiger 21, one thing should become abundantly clear. Unlike many in the middle class, who follow the 60/40 asset allocation strategy — 60% stocks/40% bonds — those near or on the level of Tiger 21 are heavily allocated to assets offering a mix of both passive income and growth potential. Public equities and bonds occupy a small piece of the pie.  

Why The Mix Of Passive Income And Growth?

Simply because the rich look beyond their own lives. They plan for future generations. Passive income provides for present needs and can be reinvested to generate passive income in perpetuity. Appreciation of the underlying asset offers another level of wealth building public equities and debt don’t offer.

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 don’t find a way to make money while you sleep, you will work until you die.” Many in the middle class will trade time for money until they retire. In many cases, seniors financially unprepared for retirement will continue trading time for money long beyond their retirement ages.

A simple formula to conceptualize the impact of passive income shows what can help reach financial independence: Passive income > expenses = financial independence. You can achieve financial independence when your passive income exceeds your expenses. Why define financial freedom this way? Because, unless you can walk away from your job and still maintain your lifestyle, you are not financially independent. It doesn’t matter how much you cut your expenses by. Without passive income, you will still need to work at some point to cover those expenses.  

Mitigates Recessions And Downturns

Passive income can help mitigate the potential economic effects from recessions and unforeseen situations like the Covid-19 pandemic. Investments in recession-proof assets are 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 any potential loss of income or lifestyle during a recession.

Live Your Best Life

Passive income offers a way for you to live your best life now. Most retirement plans are delayed gratification plans. It’s tightening your belt now not to have to suffer later. With passive income, you can stop trading time for money and buy back your time. It gives you a greater opportunity for freedom to walk away from your day job if you choose and pursue other ventures and passions.  

How To Get Started

There are multiple printed and online educational resources on the subject of passive income — with many focused on particular assets. These are valuable resources for the newbie investors looking into passive income investments, but in my own experience, I have found that the best resource for learning about new investments is through investors already involved in them. Many of these investors can be found on LinkedIn and other social media investing circles and many are happy to share their experiences and knowledge. Invest in your passive investment education and take the time to seek out experienced investors to maximize your readiness and opportunities.

If you want to take a day off from work to golf 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 this possible.


Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?


Post a Comment