On this episode of The Passive Income Attorney, Seth discusses some of the ways you can invest your money. From traditional investments to affiliate marketing to investing in start-ups, Seth has some tips to help you along your way to becoming a passive investor or improving your portfolio.
0:00 – Intro
2:20 – Seth begins by talking about traditional investments like stocks, bonds and mutual funds.
2:58 – For people who have trouble saving money, it’s a good thing to send a percentage of your paycheck to your 401k
3:22 – These investments are really passive
3:50 – Traditional investments involve a high level of risk
4:52 – The latest market crash shows the volatility of the stock market
5:23 – The returns just aren’t there for the stock market
7:18 – Investing in a business could be active investing but it depends
8:25 – Affiliate marketing is when someone gets paid a commission to send people towards another person’s website
9:39 – This would take time away from your profession
10:05 – Passively investing in a start-up business is also an option
10:42 – These investments are high risk/high reward
Hello there, law nation. I just want to thank you so much for tuning in today. I know your time is extremely valuable and I’m not even talking about just the $400 or whatever you charge per billable hour. I’m talking about the time you could be spending doing just about anything else, but instead you’ve made the commitment to yourself to educate yourself and maximize your knowledge regarding financial education. It may not seem like it right now, but you are investing time so that you can unshackle yourself from the billable hour later, billables no more, no mas.
Today we’re summarizing the different types of passive income streams that you can invest in to become an attorney by design, or if you’re not an attorney to live a lifestyle by design, this is part one of the part two series summarizing some of the passive income streams that you should look into and really consider.
Now, of course, I have my favorites that I invest in, but I want to present to you just a brief overview of some of the major types of passive investments so that you can decide which ones are the best fit for you and your personality, your risk tolerance, the money you have to invest. And even though we’re talking about passive investments, the amount of time that you have to devote to these investments, because of course, you know, one person’s idea of passive is not another person’s idea of passive. It can be more active or less active, more passive or less passive. The definition of quote unquote, passive is just different from person to person as discussed in a previous episode. So, we’ll go through a few of these. Some are more passive or active than others. And in a future episode, we’ll actually take a deeper dive into what is truly passive versus what is active.
So, let’s start off with the bundle of investments that all of us are very familiar with. These are what I call traditional investments. So, these include stocks, bonds, mutual funds, index funds even REITs, generally, you know, the public markets. So, we’ve all invested in these assets either individually or through our firm’s 401k or IRA or both. And these are what mom and dad invested in. What most of us likely grew up thinking about when someone said investment. You can make great money in traditional investments. Many of us have, I have. And if your firm has a matching program, really doesn’t make sense, not to at least hold back enough to receive that matching bonus.
Now, another good aspect of this is for people that have trouble saving money. If you automatically duct certain percentages of your paycheck to go to your 401k, then you don’t even have the opportunity to blow it on that new five series. And that’s probably a good thing, but more of an issue with self-discipline. So, I’m certainly guilty of it. As I can see it sitting in my driveway right now.
On the passive to active scale, traditional are also really passive, unless you’re a day trader, you generally don’t have to do much of anything. You may meet your financial advisor who may seem concerned about your financial wellbeing, but really, he’s just gathering your age and income. And will plug you into a computer model, which will spit out a typical 60, 40 stock bond investment split, of course, you know, with a few variations, but it all comes out in the wash. But the shoes with traditional investments are very apparent. At least to me. The first thing that comes to mind is risk. Risk and relatedly volatility and uncertainty. The two most recent examples being the great recession in 2008, where 401ks became 201K, which was absolutely devastating, especially for those nearing retirement or in retirement. And it was truly sad to see. But this does give you a great demonstration, the risk volatility, and uncertainty associated with the public markets.
The most recent example, of course, being the COVID-19 pandemic that we’re still dealing with, where the stock market crashed around 30%. Now, although it has since recovered, this podcast episode being recorded in the fall winter of 2020, this crash still demonstrates the incredible volatility and fragility of the stock market and how it can be immensely influenced by outside forces like a bat pandemic from Asia or a European debt crisis. Like my friend Hunter Thompson refers to quite often, events that cannot be controlled or predicted with any sort of certainty by you, me, your financial advisor or anyone. And anyone who says that they can, well they are full of shit.
Just as important, the returns, they’re just not there. Now, we’ve been on an upswing of the market for quite some time since pandemic, but over a long time period of time, the S & P 500 index annual return. Well, actually since the inception of it, is 7.96%. Now that’s actually not that bad. You know, if you said, Hey, I’ll give you 8% on your money, not bad at all, but that really doesn’t even tell the full story. Relating again back to volatility, in 2017 the average was a whopping 21.83%, but in 2018, the returns were 4.38%. Then recovering again in 2019, followed by COVID in 2020.
So, these return numbers also do not factor in the fees and the commissions, your financial advisors and mutual fund managers take from your returns. No matter if you make it money or not, there is no alignment of interests. They get paid no matter what. The average financial advisor fee is around 1%, not even included commissions on trades, performance-based fees, brokerage fees, custodial fees, and other third-party fees, such as you know, from mutual funds or ETFs. And on top of that, the average annual cost of a mutual fund is 1.25%. So, you all are smart cookies. You may be misinformed, but certainly intelligent. You can imagine how these fees affect your overall return profile. These fees are often glossed over by your financial advisor. Whenever they’re trying to get you to roll over into a new 401k or sign up with, you know, one of these big financial advisory firms.
So anyways, let’s move on. How about starting a business or investing in a business? Most would say, this is more on the active side, but it really depends. Let’s say you buy a brick and mortar business such as a franchise. For instance, I own a burn boot camp franchise. It’s a boutique fitness gym focused on marketing to women. My wife runs the operation side, but given my legal experience, I’ve been pulled into the fold on a regular basis, but you know, it’s fun though. It’s not passive, but it is rewarding, and it is fun, but it’s certainly not passive by any means. It’s active. It is very active. So, you know, but I could foresee this business going on autopilot, which is why I got into it, or at least semi autopilot once totally established. And perhaps once we have multiple locations to justify proper staffing to achieve that autopilot, so stay tuned.
But I’ve seen others certainly accomplish this through fast food restaurants, other boutique gym franchises, etc. So, you can do it. Now, if that sounds like something you’d like to look into, I’d love to talk to you more about it. Feel free to reach out. How about an online business, like through affiliate marketing or selling digital products, or, you know, a coaching product, something like that. For those of you who don’t know affiliate marketing is essentially a marketing strategy where a person gets paid a commission for sending customers to another person’s website or products. So, this is definitely something you could look into and once started the very passive and potentially profitable. The big pros are low barrier of entry in terms of costs, expertise, and flexibility of time commitment. You also don’t need a physical product to sell as it’s simply a referral to somebody else’s business or product. On the passive active gradient scale, it’s pretty passive once properly set up, but you’ll need to monitor and tweak your strategy and continually generate leads as you go along to be successful.
The big drawbacks include competition due to the low barriers of entry, the lack of consistent customer base and cashflow and potential time-suck. Many of the best affiliate marketers create content through YouTube videos and reviews, social media campaigns, and podcasts in order to continually generate those leads for their affiliate products. And quite honestly, this is simply time that you would have to take away from your legal practice or medical practice. And it’s not something you probably want to do. But who knows? And I’ll have someone on the show in a later episode who will be an expert at affiliate marketing, and maybe they’ll be able to talk to you into it. Maybe me too.
One more business-related opportunity I’d like to touch on is investing passively as opposed to actively in a startup business. Like as a, you know, as an angel investor, you can invest passively in anything from restaurants to tech companies and receive ongoing returns and perhaps even large, massive sums of money from capital events, such as a sale or a merger or an IPO. These investments present themselves when businesses need startup capital or some sort of a capital infusion. And again, these investments are sometimes referred to as angel investments and you would be an angel investor. As you can imagine though, these types of investments in startup companies and businesses are high risk high reward. They’re certainly not for the faint of heart.
New companies have not established a solid track record of success. So, it can be quite difficult to predict if their enterprise will become successful in the future. These types of investments should not be entered into lightly. And they require lots of research and analysis. In many times, experience is necessary to invest in startups, in an appropriate, educated, and really a sophisticated manner. And we’ll take a deeper dive into these types of investments in a separate feature episode as well.
Now, today we discussed the traditional investments such as stocks, bonds, and mutual funds, as well as various types of businesses, including brick and mortar, online, affiliate marketing, franchises, angel investing, you know, do any of these appeal to you? Have you invested in any of these income streams yourself? What do you like about them? What do you hate about them? What are you worried about? I’d love to hear your feedback. Reach out to me by email at email@example.com and I’d love to hear from you.
Now, what other types of passive income stream generators are there? Many. But in part two of this miniseries, we’ll go over a few different aspects of one of the most used and my favorite passive income generator real estate. If you want to learn more about passive income through private equity, real estate or other alternative investments, go check out my website at www.passiveincomeattorney.com and for a limited time, and you’ll see a prompt where you can download my free passive investing guide to really jumpstart your education on passive income streams. And if you could please just take a few moments out of your time and leave a five-star rating and a positive review for us, it would be greatly appreciated. And until next time, enjoy the journey.