investment

An investment article from the site evajinek.nl discusses the seemingly endless possibilities of passive income. One of the popular topics of passive income is FIRE: financially independent, retire early. Why is there more attention to this movement now than ever, and what are the best ways to accumulate passive income? Patrick Verwijmeren, Professor of Corporate Finance at Erasmus School of Economics, shares his insights on the subject and offers recommendations.

Covid-19 changed the whole playing field

Since the corona pandemic, many have come to understand that life is often more unpredictable than one would expect. People lost their jobs, and with them immediately their only source of income. With a mortgage or rent to be paid, it’s nice to have some money on hand. Some people even dream of waking up after a good night’s sleep to find their monthly rent credited to their bank account. However, Verwijmeren points out the risk inherent in earning a passive income: ‘To become rich in sleep is perhaps a little too simplistic. After all, you are also taking a risk’.

Diversification

By spending less than you earn, it is possible to put some money aside for investment. By doing this in a disciplined way, this money can, if invested well, grow into an impressive pension. Verwijmeren emphasizes the importance of diversifying risks: “If we look at finance theory, then spreading is an essential starting point. Spreading is better than not spreading.

This can be true for income sources as well’. An illuminating example he cites is the process of writing a book. Since it is impossible to be sure of the return, it is unwise to put all your time in writing the book: ‘if you want to reduce risk, it is better not to put all your eggs in one basket’.

Of course, this is only one of the many ways to earn a passive income. For example, there are also those who transfer their knowledge through pre-recorded lessons, which one can then watch through paid subscriptions, Skillshare being a well-known example. However, don’t expect to get rich within a short period of time and be able to quit your job: ‘it’s a long-term income source. You can’t make an annual living from it in the beginning. You put money in it now and in the future you will reap the benefits’.

Investing in trackers or active investing?

investment

If you are prepared to invest time in your investments, a good start to your adventure is a so-called shadow portfolio. Verwijmeren: ‘You don’t actually buy the shares, but you can see what it would have meant if you had bought them. So you can practice and that’s great fun’.

By investing actively, you do expose yourself to a large amount of risk: if you are not financially literate, active investing looks suspiciously like a game of roulette. Because of the dangers involved, Verwijmeren recommends buying trackers, also known as ETFs.

If you buy a tracker, you buy the entire AEX or another index, as it were, but then packaged in a single share. Your stock follows this index. This is an efficient way to start on the stock market. And your assets are spread out anyway, because they follow the entire index. This is important to keep your risk low’. It is also possible to invest in so-called ESG trackers, which is a relatively new development in the financial world.

ESG (Environmental, Social and Governance) trackers are sustainable ETFs.

In addition to investing in the stock market, it is also possible to diversify by investing in other opportunities such as gold, art and real estate. By balancing your portfolio with investments that move in opposite directions when the financial market develops, you carry less risk. An example of this is the antagonistic relationship between bonds and stocks: historical data show that stocks perform well when bonds perform poorly and vice versa. This strategy should secure your passive income.