Imagine yourself earning USD$37 Million a day, USD$428 per second while sitting on the couch.

Possible?

Yes!

Warren Buffett made USD$37 million in just one day sitting in his chair reading.

To put it into perspective, big time Hollywood actress Angelina Jolie made approx USD$28 million after entire year of acting.

Why the difference?

This is all because of one simple word,

‘Investing’

Warren Buffett is the legend of value investing, and through his mastery of investing, it have made him a multi-billionaire.

Although we may not become a billionaire anytime soon. You can definitely generate a decent income when invest in the right investment vehicles.

I will like to introduce to you a particular investing strategy that enables you to generate an income while you are reading books or doing anything that you like.

This particular investing strategy have 2 major advantages:

  1. No active management of your portfolio
  2. No in-depth investing knowledge needed 

Yes, you may have guessed it! We are talking about “Passive Investing”.

All investing and even passive investing comes with a certain level of risk. But wouldn’t it be amazing that you can earn money while you eat, sleep, or go on a trip?

Imagine waking up in the morning with more money in the bank than you did before you went to sleep, isn’t that just amazing?

Good news! You don’t need to be Warren Buffett to do this.

Surely you may not earn USD$37 million per day through investing like Warren Buffett. But you will definitely able to grow your income passively through these investment vehicles that I am going to introduce to you.

There is just one prerequisite:

‘Discipline’

  • You need to be discipline to stick to your goals.
  • You have to be discipline to set aside a percentage of your salary to invest.
  • You have to be discipline to invest in what you know.

Simple!

Let’s Dive In!

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Here are some of the best investment for passive income

Bonds

Bonds are basically an investment instrument where you will be lending money to a corporation or to a government. In return, the borrower will give you a determined interest payments that is to be paid to you for the loan period. At the maturity of the bond (end of bond), your initial capital together with the last interest payment will be paid to you.

Bonds are generally considered lower risk when in compared with stocks. Some bonds which have some of the lowest risk of defaulting, these backed by government or issued by blue chip companies. While some are considered the high risk bonds, these are generally called ‘junk bond’. These ‘junk’ bonds’ are of a higher risk of defaulting and we will generally not want to buy them.

There are 3 independent bond rating services that help us to identity which are good quality bonds and which are’junk’ bonds:

  1. Fitch Ratings Inc.
  2. Standard & Poor’s
  3. Moody’s Investors Service

These agencies conduct a thorough financial analysis of the company or organisation that issue the bonds. Based on each agency’s set of criteria, such as their ability to pay debt, growth and general financial health of the company. These independent agencies will issue a overall rating of the bond.

Good Quality Bonds

These bonds are rated as investment grade bonds. They are view as a safe and stable option for investment. Many people who are not as risk adverse generally choose to invest in this type of bonds. 

Such bonds are often tied with backing from the government or major corporations. These investment grade bonds are often given a high rating:

Fitch Ratings Inc.

  • “AAA” to “BBB-“

Standard and Poor’s

  • “AAA” to “BBB-“

Moody’s Investors Service

  • “Aaa” to “Baa3”

Investment grade bonds tend to see bond yields increase as ratings decrease.

One example of such bond is the U.S. Treasury bonds, “AAA” rated bond securities.

These bonds usually give 0.1% to 10% annual return.

Low Quality Bonds

These are the non-investment grade bonds or what we commonly called as the ‘junk bonds”. These bonds do not have a healthy financial health and have a higher risk of defaulting which lead to the investor to loss all investment capital.

Such ‘junk bonds’ are usually of higher risk and is usually not recommended to invest. These non-investment grade bonds are often given a low rating:

Fitch Ratings Inc.

  • “BB+” to “D“

Standard and Poor’s

  • “BB+” to “D“

Moody’s Investors Service

  • “Ba1” to “C”

Non-investment grade bonds tend to see extremely high bond yields to attract investors. Often, unsuspected investors which invest in these bonds will be left with nothing. When the bond issuer are forced to close down due to liquidity issues, the investors losses their invested capital.

These bonds usually give 5% to 50% annual return.

I will not want to buy these “junk bonds” due to the risk of defaulting is much higher when compared with a good quality bond.

Example

Let’s say you have decided to invest in a good quality bond that gives a 5% return annually with a maturity of 10 years.

You invested $10,000 in the Good Quality Bond.

With an average annual return of 5%, you will get $500 passive income through investing in bonds.

This $500 will be your passive income paid to you for the next 10 years (Total of $5,000). On the 10th year on the maturity of the bond, you initial invested capital of $10,000 will be paid to you.

This means by buying a Good Quality Bond, your initial investment of $10,000 earns you $5,000 in 10 years without you doing anything!

What if

You investing $10,000 into 10 of these good quality bonds that give you a return of 5% every year.

  • Total Investment: $100,000
  • Total passive income annually: $5,000

Getting $5,000 annually without doing anything sounds pretty good if you ask me. It is like getting an extra month of pay every year for you to take your family travel or to buy that watch you have always wanted.

With $500,000 invested, you will have $25,000 passive income annually which will probably be enough for a simple retirement at your 60’s.

Investing in good quality bond is probably one of the safest way to earn a passive income for your retirement.

Best Investment for Passive Income - Bonds

Exchange Traded Funds

Exchange-traded fund (ETF) is a form of index fund that track a specified basket of underlying investments. It is designed to mirror the performance of the underlying index they track.

Here are some examples of ETF:

  • S&P 500 ETF – Measures the stock performance of 500 large companies listed on stock exchanges in the U.S.
  • Russell 2000 ETF – Measures the stock performance of 2,000 smallest-cap American companies
  • Wilshire 5000 ETF – Largest U.S. equities index
  • MSCI EAFE ETF – Basket of foreign stocks from Europe, Austral, Asia
  • Nasdaq ETF- Measures the stock performance of Nasdaq
  • Dow Jones Industrial Average (DJIA) ETF – Measure performance of 30 large-cap U.S. companies
  • Nikko AM STI ETF – Measure performance of FTSE Straits Times Index of Singapore
  • iShares MSCI Hong Kong ETF – Measure performance of stocks composed of Hong Kong equities

Pros:

  • Passively Managed
  • Low Expense Ratio
  • Diversified
  • Low Stress
  • Perform better than many retail investors
  • Pay dividend yearly, quarterly or even monthly!

Cons:

  • Returns fluctuate with the market cycle
  • Suitable for people who invest for at least 10 to 20 years

S&P 500 as an example for the average year-on-year Returns:

  • 30 Years at 6.73%
  • 10 Years at 8.18%
  • 1 Year at -4.38%

Annual return over a short period of time can vary, but over a period of 10 to 30 years you will get an average of 6% to 8% annual return.

Example

On your first year, you invested $10,000 in ETF.

With an average annual return of 6% to 8%, you will get an approx. $600 to $800 passive income through investing in ETF.

For the subsequent years, you invested $10,000 into the ETF every year.

After 10 years of investment, you will have placed 10 times $10,000 in ETF.

With a simple calculation you will have around $100,000 invested in the ETF, which gives you an annual return of $6,000 to $8,000 passive income from your investment.

But if you reinvest all your dividend and did not withdraw a single cent from your investment for the past 10 years, the numbers will blow your mind.

With the help of a compound interest calculator. The total amount invested in the ETF with a return of 6% to 8% will be approx $140,000 to $156,000. This translates to $8,400 to $12,480 passive income per year!

What if

You start investing $10,000 in ETF at 30 years old and reinvest every single cent for 30 years.

You have decided to retire at the age of 60 and start to live off from the passive income from your investment. How much passive income will you get then?

  • Annual investment: $10,000
  • Investment duration: 30 Years
  • Investment average annual return 8%

A simple calculation using the compound interest calculator shows that you will have grown your ETF portfolio to a value of approx $1,200,000 ($1.2 million). If you calculate it carefully, for the past 30 years you have only invested $300K in the ETF. But because of compound annual return of 8%, your investment have grown to $1.2 Million. This simple investment strategy have just earn you $900K in 30 years. 

With an annual return of 8% per year from your ETF portfolio value of $1.2 Million. It is calculated to be $96,000 passive income per year!

At age of 60 years old, it is the perfect time for your retirement!

Do you think you can live comfortably with $96,000 per year passive income?

I surely think so.

Best Investment for Passive Income - ETFs

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Real Estate Investment Trust (REITs)

Investing in real estate requires lots of cash and financial muscle. Real Estate investment Trust (REITs) on the other hand is only requires you to have a few hundreds of dollars to start investing in the real estate. Regulated by the government to ensure 90% of the net income is to be paid to the investor, this makes REITs one of the best investment to generate passive income.

REITs are generally consist of more than one properties and are managed by a team of professional property manager. REITs gives you the benefit of being a landlord by having a consistent stream of rental income in the form of dividend flowing into your bank. While taking away most of the headache that comes with becoming a landlord, by not requiring you to manage the tenants.

Pros:

  • Passively Managed
  • Growth potential
  • Diversified
  • Low Stress
  • High dividend yield 
  • Pay dividend half-yearly, quarterly or even monthly!

Cons:

  • Dividend yield fluctuate with the market cycle
  • Suitable for people who invest for at least 10 to 20 years

Average Return

  • Average dividend yield is 5%
  • Average annual return of 11.8%

PS. Some REITs can have a high dividend yield of over 10% or more during the market downturn.

REITs is one of my most loved form of investment, and thus I have written a whole list of articles on REITs.

Highly recommended you to read ‘Risk and Benefit of REITs‘. You will definitely find something interesting in the article which can be beneficial to you.

Example

For simplicity the return of the REITs is as follow:

  • 5% Average Dividend Yield
  • 10% Annual Growth Rate for REITs Portfolio

On your first year, you invested $10,000 in REITs.

With an average dividend yield of 5%, you will get an approx. $500 passive income through investing in REITs for the first year.

For the subsequent years, your REITs portfolio grow by 10% year-on-year while giving you an annual dividend yield of 5%.

After 10 years your initial investment of $10,000 in REITs will have grown to $25,937.42! Your annual dividend received of 5% will become $1,296.87!

Your dividend yield on cost will be a whooping 12.96%!

What if

You start investing $50,000 in REITs at 30 years old and the REITs grow 10% every year for 30 years.

You have decided to retire at the age of 60 and start to live off from the passive income from your investment. How much passive income will you get then?

  • Starting investment: $50,000
  • Investment duration: 30 Years
  • REITs investment portfolio grow on average of 10%
  • Dividend Yield of 5%

A simple calculation using the compound interest calculator shows that you will have grown your REITs portfolio to a value of approx $872,470.11. With only $300K invested, after 30 years you have $872K.

If you have reinvested every single cent of your dividend, the amount you have in 30 years time is even more staggering! You will have grown your portfolio to a value of approx. $4,377,049.76 ($4.37 Million). 

This is the power of compounding.

With an annual dividend yield of of 5% per year from your REITs portfolio value of $4.37 Million. It is calculated to be $218,500 passive income per year!

At age of 60 years old and $218,500 passive income to spend every year for your retirement sounds pretty good isn’t it?

Happy retirement?

I surely think so.

Best Investment for Passive Income - ETFs

Bringing IT All Together

Passive income from investing is not only possible, it can be easily achieved by anyone. Discipline is the key.

Passive income by investing is not a get rich quick strategy, but a way for you to get rich comfortably and eventually.

Here are the few of the best investment for passive income:

  1. Bonds
  2. Exchange Traded Funds (ETFs)
  3. Real Estate Industrial Trusts (REITs)

In this article, we have just explored some of the best ways you can actually generate passive income through investing. These investment may not make you rich overnight. But in 10, 20 or 30 years time, you will be glad you have invested today.

Nonetheless, every actions or investment comes with risk and care should be taken when performing each task.

“More You Learn, More You Earn.”

Wisdom from Billionaire Warren Buffett:

Success is not made overnight, but through determination and the conviction to keep learning and getting better.

Remember the difference between success and failure is what you know, and what actions you take.

Here are some resources what will help in guiding you to your success.

What guides me in my journey are some of the many books I read for the past years. There also many words of wisdom said by those who have achieve what we want to achieve and to learn from them is the shortcut to our goals.

Taking your First Step is always hardest, But it is the Most Important Step to Greatness

Budgeting Plan Development

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