Someone’s sitting in the shade today because someone planted a tree a long time ago. – Warren Buffet
Investing can provide you with a nest egg, supplement your income, or even be a full-time avocation. For most of us; however, active management of equities or more exotic investment types is something we don’t have time to do and often ends up being a waste of our time. Luckily, the financial services industry has created some excellent passive investing tools to help us start investing, no matter how much time we have.
Many of these passive investing tools deliver higher returns than an average mutual fund for their investors by reducing fees. Exchange traded funds (ETFs) are one such recent development. ETFs are designed to track the price movement of things like the Dow Jones index or the price of cocoa beans. There are even ETFs designed solely to capitalize on the growth of a country. Since ETFs reduce fees by trading in bulk and cutting management fees, they see considerably less turnover in their holdings than mutual funds.
Services like Betterment help you maintain your ETF portfolio in exchange for a percentage (.3 to .9%) of your funds every 3 months. There are also no fees for transfers or trades and no minimum balance requirement. E-Trade also allows you to maintain a portfolio of ETFs, but requires considerably more management since you need to reinvest your own dividends and arrange your own buy and sell orders. E-Trade also charges transfer fees and requires a minimum balance to avoid charges.
Bonds are another great source of passive income and are often cited as a necessary addition to a balanced and diversified portfolio. Bonds historically yield less than stocks due to their greater security. To avoid paying commission on the purchase of U.S government bonds, bonds can be bought directly from Treasury.
A third option for the passive investor who’s looking to produce income while diversifying and reducing risk might be a Real Estate Investment Trust. An REIT is sort of like a real estate mutual fund – where it buys up real estate, which it then rents out. To qualify for status as a REIT, the corporate entity is required by Federal law to distribute 90% of its income to shareholders. Thus holding a REIT in your portfolio is like holding a high yielding dividend stock whose performance is tied to the price of real estate. Like stocks, REITs are bought and sold on all the major exchanges, most often through an online brokerage account.
No matter what your investment style, there is a plethora of ways to move your money out of your mattress and into the world. As William Shedd said, “A ship is safe in harbor, but that’s not what ships are for.”