Let’s cut to the chase; if you’re a passive investor, your main goal is to build wealth gradually. Passive investing is, ideally, a long-term strategy in which you’ll wait for the assets you acquire to appreciate and then make a profit. The amazing thing about this strategy is that there are many ways to get into passive investing; from stocks, bonds, and land to even art pieces!
However, to achieve the main goal you need a clear path to success. Regardless of the strategy, it’s important to set goals that will guide your decision-making during your investing journey.
If you’re just starting out, setting goals with this form of investing can be tricky when the returns are difficult to calculate. For that reason, we’ve prepared some tips on how you can properly set goals when utilizing passive investments.
Setting Your Goals As A Passive Investor
The first thing you need to understand is this: If your expectations are unrealistic, you could be disappointed in the returns on your investments.
Set your goals with an understanding of how passive investing works. As you get passive income, you’ll gradually gain more economic independence and increase your wealth. Although don’t expect this will happen overnight since it requires you to keep learning and adjusting the strategy.
Here are 5 tips that can help you along the way if you want to be a passive investor:
1. Set Modest Return Goals
While it is a less risky form of investment, the returns are generally random. High returns can be made but in rare cases. The best thing you can do is to expect modest investment returns. If you make this the main goal, your portfolio should be able to withstand a slightly worse return than you expected.
The good news is that a passive investment is cheaper, less complex and often produces superior after-tax results over medium to long time horizons than actively managed portfolios.
2. Commit To The Right Strategy
Be it real estate, dividend stocks, index funds, or peer-to-peer lending, there are many types of passive investments you can make. To choose the right strategy, you need to take into account your preferences and knowledge of the investment you want to make.
There’s a reason why real estate investments have always been the top choice for many. Real estate has historically proven to be a stable investment vehicle. Land doesn’t depreciate like other types of assets, and currently, there’s an ongoing rise in property values that has occurred in most locations over the past 10 years. If you’re playing for the long term, There’s no better option.
If your goal is to establish a stable source of passive income, investing your money in real estate is a great idea. You could, for example, take part in syndication for a residential building or an assisted living facility, and make money from collecting rents.
Taking it a step further, you can consider a ground-up development of a rental property. Since it is going to be constructed from zero, there will be ample room to adapt and expand as your business grows and the demand increases.
Of course, there are other strategies for a passive investment. You could try crowdfunding and invest in REITs, options that can offer great tax benefits. You could also look into dividend stocks, which are an easy way to generate income.
3. Save Enough Money To Invest
You need to identify how much money you should save. Regardless of whether you want to just expand your portfolio or increase the amount of money you’ll have for your retirement years, it is important you set a goal for the revenue you want to earn and save from your investments. A good rule of thumb when saving for retirement is to set aside enough money to cover at least 70 percent of the income that you bring in before retirement.
Remember that your goals will also largely depend on the kind of activities you’ll want to do once you retire. For instance, if traveling the world is part of your bucket list, your savings may need to be even higher. Several investment firms recommend saving around 10 times the amount of money you make in a year by the time that you turn 67.
Do the math! For example, if you make $100,000 a year, you could have around $1 million in savings by the time that you’re 67 if you stick to a strategy. Once you know how much you want to save, you will have a better idea of what your goals should be.
4. Prepare To Overcome Challenges
If you want to reach the goals that you set for your investments, it’s important that you know how to overcome any hurdles that will come along the way. Even though passive investors aren’t exposed to as many risks as other types of investors, you can still lose money. Remember that type of investment is better suited to a long-term strategy. You have to wait until your assets reach an acceptable value considering selling. The idea is for you to get a sizable return.
Be patient! You’ll face value dips from time to time as well as the much-desired appreciation. Selling when the market goes down is giving in to panic, and that’s a bad idea. Hold onto your assets and trust that these fluctuations in value not only are normal but expected. In the end, play the waiting game for a favorable return and sell at the right time. As a passive investor, always maintain a calm and measurable approach to investing.
5. Have A Clear Timeline With Your Investments
Goals need to be measurable so they can be attained. Creating a clear timeline for when you want your net income is crucial. If you plan properly, it will be easier for you to avoid selling too early or to hold on for too long, since you know exactly how much time you are prepared to allow before cashing in. 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 passive investor, diversifying your portfolio is step one. Following these tips will make most of your investments simpler and easier to manage, which helps to reduce overall risk.
Even though defining goals isn’t always easy, taking time to do so will go a long way. Clear goals will help you avoid making costly mistakes when you invest your money. As a passive investor, your greatest asset should be patience. Trust in the process and you’ll see that the income that you generate could be higher than anticipated.