Why “Passive Income” Doesn’t Exist 👎
More and more investors are making a move towards "passive income", and yet it seems that the majority who follow this path are new investors who do not understand the concept of their investments. Today let's look at why the idea of "passive income" doesn't totally exist nor is it safe and guaranteed for investing.
Passive income is the idea that you create a stream of income for yourself that you no longer have to work for. This might be something like selling online products or receiving a commission from someone else's work. The goal is to generate wealth with minimal effort. This sounds like the dream right? Everyone wants to make money while they sleep and not put in effort. But is this actually something you can do with your investments?
Not everyone wants to become a business owner, or sell a product, or create wealth in a way that requires background knowledge. This leads many people to the idea of investing their money. Investing allows you to put money in, wait and hopefully take more money out. This is about as easy as it gets right? Well, not exactly. The problem is most people don't realize what's actually happening with your money. It's concerning how large the section of "Passive Income" is growing on Blossom and yet the posts there miss so many fundamental rules and is largely targeted towards beginners.
While investing in itself maybe passively generating wealth, it's not as simple as you think, let's talk about why. Working a job requires 2 main things: Time and Effort. If you work at the grocery store you get paid for your time and effort for the company. As long as you do a good job (and no larger issues with the business) you are basically guaranteed a paycheque. There is not a large risk of you losing money until you quit your job. This is what we call "active" income. So what about passive income? Well the biggest thing we aim to save is Time and Effort, but we can't exactly get rid of those for free. So what does it get replaced with?
RISK.
This is the absolute key to remember and what most don't understand about passive income: risk. There is no such thing as a free lunch in investing, since it's so simple to invest then rather than work, there's risk.
The passive income section on Blossom is largely filled with those receiving income from either dividend ETFs/Stocks or much more popular lately covered call funds. The MASSIVE problem I am seeing is that many new investors are treating these income funds (stable, low-yield dividend funds or highly unstable income funds) as something separate from investing. It's almost as if many investors think these income funds exist in their own free bubble of money.
Spoiler Alert: They don't.
The problem is becoming relevant because many investors buy these thinking the large payouts are a great opportunity, then proceed to suggest them to beginners. With these "passive income" strategies comes with a massive amount of risk. Much of these funds are associated with single stock performance, and are equivalent to buying an underperforming, highly leveraged version of the company (and management fees galore!). A beginner investor should absolutely not be touching these whatsoever. You are subject to not only the potential failing of the business (losing anywhere from 10-100% of your money), but also 25% or more leverage either direction, management fees, and failing of the fund issuer. Even if the fund tracks an index it is subject to all the same risks as the underlying holdings plus what's already stated.
Investing is not free money. Since there isn't much work you have to do to invest, it's replaced with risk. The idea that investing is safe is only correlated to owning market index funds over a period of 20-30+ years. Anything outside of this drastically increases your risk. Passive income funds are no different. The money you receive in the form of "yield" is not only NOT guaranteed, but likely hurting your long term investing future.
If you are a beginner and you own these funds, I would highly suggest you sell them and buy low-cost index funds as there's likely a lot you don't understand about what you own. If you are someone who owns these and suggests them as safe options for beginner investors, just know you are a danger to those around you and you're actively screwing over someone's potential retirement. You aren't a helpful person.
If any of you have been swayed into pursuing a path of passive income when you don't even need money, feel free to talk to me I'd be glad to help you understand the risks you're taking. There is no free money without risk, and most of you don't realize how bad it might be. If you have any questions don't hesitate to ask, and as always do your research and happy investing!
