The Myth Of Passive Income

I see a lot of people chasing the dream of passive income.

Like unicorns, the Tooth Fairy, and – sadly – Santa Claus, truly passive income does NOT exist!

The only true ‘set & forget’ passive income comes from sub-standard investments such as bonds, CD’s, mutual funds, dividend stocks, and the like.

All true income-producing investments require at least some work in selecting/maintaining the income source

e.g. Rental real-estate requires work to locate the best deals, then requires further work to locate and retain the best tenants, and requires even more work to maintain the property.

Of course, some of this can be outsourced to Realtors and property managers, but you cannot outsource your worry (e.g. if the property lies vacant and your mortgage payment falls due).

Even more, a business can never truly be passive: you will always have to worry about staff, clients, and finances.

Even if you hire staff to manage all of these areas for you, you will still have to oversee – and, worry about – them!

In my experience, the higher the return you expect, the less passive is your investment.

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7 thoughts on “The Myth Of Passive Income

  1. I don’t know what sort of return you require but I have invested in a number of dividend producing stocks over more than 20 years and at least for my purposes the returns have hardly been sub-standard. Investments in MO, PM and MCD to mention several have provided very nice returns over the years.

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  3. Adrian, is this an absolute, or more of a warning to people who might be depending on a simple formula (“if I have $X invested, each year it’ll generate $Y, and I’ll never have to work again!”) in place of more informed planning?

    I do like the idea of being active (chasing after your dreams and making them happen) as opposed to passive (waiting for good things to fall into our laps). Active implies more control on our part, passive implies that we’re depending on factors outside of our control (to some degree).

  4. @ Tim – Specifically-selected ‘dividend stocks’ need not be sub-standard, but – as a group – they are … simply on the basis that you are artificially selecting stocks on just one component of their measured returns.

    @ Milton – I would like to be just as hands off in my retirement years as the next guy, but it’s just an unfortunate fact of life: true ‘passive’ investments have virtually no place in my pre- and post-retirement investment strategies.

  5. Adrian,

    Good point. I think what a lot of people mean by passive income is “not having to do a whole lot of work for it”.

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