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Investing

Passive Income

Passive income is a type of income that is generated with little or no ongoing effort. It is income that is earned with minimal work, such as from investments or rental properties. Passive income can provide a steady stream of income that can help to supplement a person’s regular income, allowing them to save or spend more time on other activities. Passive income is often considered a desirable source of income because it does not require constant effort or attention to generate. However, it is important to note that passive income can take time and effort to set up and maintain, and it may not always be a reliable source of income. Now read this again: it usually takes a lot of time and effort upfront to get the right systems in place to set up and maintain passive income streams, so it does not require that much effort down the road.

Passive Income

Popular Passive Income Sources

There are many different sources of passive income, and the best option for a particular person will depend on their individual circumstances, goals, and risk tolerance. Some common sources of passive income include:

  1. Dividend-paying stocks: Investing in stocks that pay dividends can provide a passive income stream.
  2. Rental properties: Owning rental properties and collecting rental income can be a source of passive income.
  3. Peer-to-peer lending: Participating in peer-to-peer lending platforms can allow you to earn passive income by lending money to individuals or small businesses.
  4. High-yield savings accounts or certificates of deposit (CDs): These can provide a small amount of passive income in the form of interest.
  5. Online businesses: Some online businesses, such as e-commerce stores or affiliate marketing websites, can generate passive income through sales or referrals.
  6. Investment properties: Investing in properties that are managed by a professional company can provide passive income in the form of rent.
  7. Royalty income: Earning royalties from creative works, such as books, music, or inventions, can provide a passive income stream.
  8. Passive index fund investments: Investing in passive index funds, which track the performance of a broad market index, can provide passive income in the form of dividends and capital appreciation.

It is important to note that many sources of passive income require upfront work and ongoing maintenance in order to generate income over the long term.

Dividend-paying stocks

To get passive income from dividend-paying stocks, you will need to invest in stocks that pay dividends. Here are the steps you can follow to do this:

  1. Determine your investment goals: Before you begin investing in dividend-paying stocks, it is important to have a clear understanding of your investment goals. This will help you to determine the type of stocks that are most appropriate for you, as well as the amount of risk you are willing to take on.
  2. Research dividend-paying stocks: Once you have determined your investment goals, you can start researching dividend-paying stocks. There are many resources available that can help you to find stocks that pay dividends, such as online stock market platforms, financial publications, and investment websites.
  3. Choose a brokerage: In order to invest in stocks, you will need to open a brokerage account. There are many different brokerage firms to choose from, and it is important to compare their fees, account minimums, and other features before deciding on one.
  4. Select your stocks: Once you have opened a brokerage account, you can start selecting the dividend-paying stocks that you want to invest in. It is generally a good idea to diversify your portfolio by investing in a variety of different stocks, rather than putting all of your money into a single stock.
  5. Monitor your investments: After you have invested in dividend-paying stocks, it is important to monitor your investments regularly to ensure that they are performing as expected. You should also be prepared to make changes to your portfolio if necessary, such as selling off under-performing stocks or adding new stocks to your portfolio.

It is important to note that investing in dividend-paying stocks carries risks, and you should be prepared for the possibility of losing money. You should also be aware that dividends are not guaranteed, and the amount and frequency of dividends may vary over time.

The S&P 500 is a stock market index that is designed to measure the performance of 500 large publicly traded companies in the United States. The historical CAGR (compound annual growth rate) of the S&P 500 represents the average annual return that an investor would have received if they had invested in the index at a particular point in the past and held onto their investment until a later point in time.

According to data from S&P Dow Jones Indices, the CAGR of the S&P 500 between 1926 and 2020 was approximately 9.8%. This means that if an investor had invested $100 in the S&P 500 in 1926 and held onto their investment until 2020, their investment would have grown to approximately $6,665, assuming that all dividends were reinvested.

The S&P 500 Dividend Aristocrats index is a subset of the S&P 500 that includes companies with a long history of consistently increasing dividends. The historical CAGR (compound annual growth rate) of the S&P 500 Dividend Aristocrats index represents the average annual return that an investor would have received if they had invested in the index at a particular point in time and held onto their investment until a later point in time.

According to data from S&P Dow Jones Indices, the CAGR of the S&P 500 Dividend Aristocrats index between 1989 and 2020 was approximately 11%. This means that if an investor had invested $100 in the S&P 500 Dividend Aristocrats index in 1989 and held onto their investment until 2020, their investment would have grown to approximately $3,465, assuming that all dividends were reinvested.

It is important to note that the CAGR is an average annual return and does not take into account the specific timing of an investment or the impact of any individual investment decisions. The actual return on an investment in the S&P 500 Dividend Aristocrats index may be higher or lower than the CAGR, depending on a variety of factors, including market conditions, the specific investments made, and the investor’s risk tolerance.

Rental Properties

Rental properties can be a source of passive income if you are able to find tenants who will pay rent on a regular basis. Here are the steps you can follow to get passive income from rental properties:

  1. Determine your investment goals: Before you begin investing in rental properties, it is important to have a clear understanding of your investment goals. This will help you to determine the type of properties that are most appropriate for you, as well as the amount of risk you are willing to take on.
  2. Research the real estate market: Once you have determined your investment goals, you can start researching the real estate market to find properties that are likely to generate a good return on your investment. You should consider factors such as the location of the property, the local rental market, and the condition of the property.
  3. Choose a property: Once you have identified a property that you would like to invest in, you will need to determine how you will finance your investment. This may involve taking out a mortgage, using cash, or using other forms of financing.
  4. Find tenants: After you have purchased a rental property, you will need to find tenants to occupy the property and pay rent. You can do this by advertising the property online or in local publications, or by working with a real estate agent or property management company.
  5. Manage the property: Once you have tenants in place, you will need to manage the property to ensure that it is well-maintained and that you are receiving regular rental payments. This may involve handling repairs and maintenance, collecting rent, and addressing any tenant issues that arise. You can often hire a third party to manage your property, but it comes at a cost of usually 8%-10% of rent collected in the US.

It is important to note that investing in rental properties carries risks, and you should be prepared for the possibility of losing money. You should also be aware that property values can fluctuate, and there is no guarantee that you will be able to find tenants or that you will receive regular rental income.

Peer-to-peer lending

Peer-to-peer (P2P) lending is a type of online lending platform that allows individuals to lend money to other individuals or small businesses directly, without going through a traditional financial institution. P2P lending can be a source of passive income if you are able to find borrowers who will pay interest on the loans that you make. Here are the steps you can follow to get passive income from P2P lending:

  1. Determine your investment goals: Before you begin investing in P2P loans, it is important to have a clear understanding of your investment goals. This will help you to determine the type of loans that are most appropriate for you, as well as the amount of risk you are willing to take on.
  2. Research P2P lending platforms: Once you have determined your investment goals, you can start researching P2P lending platforms to find one that meets your needs. There are many different P2P lending platforms to choose from, and it is important to compare their fees, loan terms, and borrower profiles before deciding on one.
  3. Choose a P2P lending platform: After you have researched different P2P lending platforms, you will need to choose one that you want to use. You will need to create an account with the platform and provide the necessary information to verify your identity and financial situation.
  4. Select your loans: Once you have an account with a P2P lending platform, you can start selecting the loans that you want to invest in. Many P2P lending platforms allow you to set filters to help you find loans that meet your investment criteria.
  5. Monitor your investments: After you have invested in P2P loans, it is important to monitor your investments regularly to ensure that the borrowers are making their payments on time. You should also be prepared to make changes to your portfolio if necessary, such as selling off underperforming loans or adding new loans to your portfolio.

It is important to note that investing in P2P loans carries risks, and you should be prepared for the possibility of losing money. You should also be aware that borrower default is a risk in P2P lending, and it is possible that you may not receive all of the payments that are due on a particular loan.

There are many different peer-to-peer (P2P) lending platforms available, and the popularity of a particular platform can vary depending on a variety of factors, including the specific features and services offered, the fees charged, and the overall market demand for P2P loans. Some popular P2P lending platforms include:

  1. PeerStreet: PeerStreet is a peer-to-peer (P2P) lending platform that focuses on real estate loans. The platform allows individual investors to invest in short-term real estate loans, which are typically secured by real estate assets such as residential or commercial properties. PeerStreet offers a variety of loan options for both borrowers and investors, and it uses a proprietary algorithm to evaluate loan applications and assess risk.PeerStreet allows investors to earn passive income by investing in real estate loans that are originated by the platform. The platform provides information about the loans that are available for investment, including the loan terms, the property that is being used as collateral, and the risk profile of the loan. Investors can choose to invest in individual loans or create a diversified portfolio by investing in a pool of loans.
  2. LendingClub: LendingClub is one of the largest and most well-known P2P lending platforms, and it offers a variety of loan options for both borrowers and investors.
  3. Prosper: Prosper is another popular P2P lending platform that offers a range of loan options for both borrowers and investors.
  4. Upstart: Upstart is a P2P lending platform that uses artificial intelligence to evaluate loan applications, and it offers a variety of loan options for both borrowers and investors.
  5. Peerform: Peerform is a P2P lending platform that offers a range of loan options for both borrowers and investors, including personal loans, small business loans, and student loans.
  6. Funding Circle: Funding Circle is a P2P lending platform that focuses on small business loans, and it offers a variety of loan options for both borrowers and investors.

It is important to carefully evaluate the features and terms of different P2P lending platforms before choosing one, as the specific terms and fees can vary widely. It is also a good idea to consider factors such as the platform’s reputation, security measures, and customer service when deciding which P2P lending platform to use.

High-yield savings accounts or certificates of deposit

High-yield savings accounts and certificates of deposit (CDs) are types of savings vehicles that offer higher interest rates than traditional savings accounts. These products can be a source of passive income if you are able to find accounts or CDs with competitive interest rates and are able to commit your funds for a specific period of time. Here are the steps you can follow to get passive income from high-yield savings accounts or CDs:

  1. Determine your investment goals: Before you begin investing in high-yield savings accounts or CDs, it is important to have a clear understanding of your investment goals. This will help you to determine the type of account or CD that is most appropriate for you, as well as the amount of risk you are willing to take on.
  2. Research high-yield savings accounts and CDs: Once you have determined your investment goals, you can start researching high-yield savings accounts and CDs to find ones that offer competitive interest rates. There are many resources available that can help you to compare the interest rates and fees of different accounts and CDs, such as online banking platforms, financial publications, and comparison websites.
  3. Choose a bank or credit union: After you have identified a high-yield savings account or CD that meets your needs, you will need to choose a bank or credit union to hold your account or CD. It is important to compare the fees, account minimums, and other features of different banks and credit unions before deciding on one.
  4. Open an account or purchase a CD: Once you have chosen a bank or credit union, you can open a high-yield savings account or purchase a CD. You will need to provide the necessary information to verify your identity and financial situation, and you may need to make an initial deposit or purchase in order to open the account or CD.
  5. Monitor your accounts or CDs: After you have opened a high-yield savings account or purchased a CD, it is important to monitor your accounts or CDs regularly to ensure that they are performing as expected. You should also be prepared to make changes to your portfolio if necessary, such as moving your funds to a different account or CD if you find a better option.

It is important to note that investing in high-yield savings accounts or CDs carries risks, and you should be prepared for the possibility of losing money. You should also be aware that the interest rates on these products can vary over time, and the value of your investment may fluctuate as a result.

Online businesses

Online businesses can be a source of passive income if you are able to create a business model that generates income without requiring a significant amount of ongoing effort or attention. Here are the steps you can follow to get passive income from an online business:

  1. Determine your business idea: Before you start an online business, it is important to have a clear idea of what you want to sell or offer. This could be a product, a service, or a combination of both.
  2. Research the market: Once you have determined your business idea, you should research the market to determine whether there is demand for your product or service. This will help you to determine whether your business is likely to be successful.
  3. Create a website or online platform: After you have determined that there is demand for your product or service, you will need to create a website or online platform where you can sell or offer your product or service. This may involve designing and building the website, setting up an e-commerce platform, and creating marketing materials.
  4. Generate traffic and sales: Once your website or online platform is set up, you will need to generate traffic and sales in order to generate passive income. This may involve implementing a variety of marketing and sales strategies, such as SEO, social media marketing, content marketing, and email marketing.
  5. Automate and delegate tasks: As your business grows, you will likely need to delegate or automate tasks in order to free up time for other activities. This may involve hiring employees or contractors, or using tools and technologies to automate tasks such as customer service, order fulfillment, and inventory management.

It is important to note that starting an online business carries risks, and you should be prepared for the possibility of losing money. You should also be aware that building a successful online business requires a significant amount of time and effort, and it may take several months or even years before you start to see a return on your investment.

There are many different niches that can be profitable for online businesses, and the specific niche that is most profitable for you will depend on a variety of factors, including your interests, skills, and resources. Some niches that have proven to be profitable for online businesses include:

  1. E-commerce: E-commerce involves selling physical or digital products online, and it is a popular niche for online businesses. This can include a wide range of products, such as clothing, electronics, home goods, and more.
  2. Digital services: Digital services include a wide range of services that can be delivered online, such as web design, marketing, and consulting.
  3. Affiliate marketing: Affiliate marketing involves promoting products or services on behalf of other companies and earning a commission on any sales that are generated.
  4. Online courses and coaching: Online courses and coaching services have become increasingly popular in recent years, and there is a wide range of topics that can be covered, including business, personal development, and hobbies.
  5. Subscription services: Subscription services involve charging customers on a recurring basis for access to products or services. This can include products such as meal delivery kits, beauty boxes, and more.

It is important to note that the profitability of a particular niche will depend on a variety of factors, including the level of competition, the demand for the products or services, and the specific business model that you use. It is a good idea to research the market carefully before starting an online business to determine whether there is demand for your product or service and whether it is likely to be profitable.

Royalty income

Royalty income is a form of passive income that is generated from the use of intellectual property, such as patents, trademarks, and copyrights. Here are the steps you can follow to get passive income from royalty income:

  1. Develop or acquire intellectual property: In order to generate royalty income, you will need to develop or acquire intellectual property that can be licensed or sold to others. This could include creating a patentable invention, developing a trademarked brand, or creating copyrighted content such as music or literature.
  2. Protect your intellectual property: Once you have developed or acquired intellectual property, it is important to protect it in order to ensure that you are able to generate royalty income. This may involve obtaining patents, trademarks, or copyrights, or entering into licensing agreements with others.
  3. License or sell your intellectual property: After you have protected your intellectual property, you can start licensing or selling it to others in order to generate royalty income. This may involve entering into licensing agreements with companies or individuals who want to use your intellectual property, or selling the rights to your intellectual property outright.
  4. Monitor your royalty income: After you have started generating royalty income, it is important to monitor your income regularly to ensure that you are receiving the full amount that is due. This may involve tracking the use of your intellectual property and enforcing your rights if necessary.

It is important to note that generating royalty income can be challenging, as it requires the development or acquisition of valuable intellectual property and the ability to protect and monetize it. It is also important to be aware that the value of intellectual property can vary over time, and there is no guarantee that you will be able to generate a steady stream of royalty income.

Passive index fund investments

Passive index fund investments can be a source of passive income if you are able to find index funds with competitive returns and are able to commit your funds for a specific period of time. Here are the steps you can follow to get passive income from index fund investments:

  1. Determine your investment goals: Before you begin investing in index funds, it is important to have a clear understanding of your investment goals. This will help you to determine the type of index fund that is most appropriate for you, as well as the amount of risk you are willing to take on.
  2. Research index funds: Once you have determined your investment goals, you can start researching index funds to find ones that meet your needs. There are many different index funds to choose from, and it is important to compare their fees, investment strategies, and track records before deciding on one.
  3. Choose an index fund: After you have researched different index funds, you will need to choose one that you want to invest in. You will need to open an account with a brokerage or mutual fund company in order to invest in an index fund.
  4. Make an investment: Once you have chosen an index fund and opened an account, you can make an investment by purchasing shares in the fund. You will need to provide the necessary information to verify your identity and financial situation, and you may need to make an initial deposit in order to start investing.
  5. Monitor your investment: After you have made an investment in an index fund, it is important to monitor your investment regularly to ensure that it is performing as expected. You should also be prepared to make changes to your portfolio if necessary, such as rebalancing your holdings or selling off underperforming investments.

It is important to note that investing in index funds carries risks, and you should be prepared for the possibility of losing money. You should also be aware that the value of your investment may fluctuate over time, and the returns that you receive will depend on the performance of the underlying index.

Some popular index funds include:

  1. S&P 500 index funds: The S&P 500 index is a market capitalization-weighted index that tracks the 500 largest publicly traded companies in the United States. There are many index funds that track the S&P 500 index, and these funds are popular due to their broad diversification and relatively low fees.
  2. International index funds: International index funds track stocks from countries outside of the United States, and they can be a good way to diversify your portfolio and potentially increase your returns.
  3. Bond index funds: Bond index funds track a basket of bonds, and they can be a good way to add fixed income exposure to your portfolio.
  4. Target-date index funds: Target-date index funds are designed to be a one-stop investment solution for retirement, and they automatically adjust the asset allocation of the fund based on the target retirement date.
  5. Sector index funds: Sector index funds track a particular sector of the market, such as technology or healthcare, and they can be a good way to gain exposure to specific industries.
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Financial Literacy Investing

The Importance Of Investing And Investing Early

If you’re considering financial independence and early retirement, investing is not an option: you must invest if you ever want to have a chance to reach financial independence, by definition. In its simplest form financial independence means your money is working hard enough to cover your lifestyle so you no longer need to exchange your time for money, meaning you no longer have to work.

Also living of savings can only last for so long and there’s only so much you can save.

If you expect to retire at 40 years old, expect to spend $50,000 per year until you leave this earth, let’s say at 80 years old, to keep the math simple, that’s 40 x $50,000 = $2,000,000 you need to save by age 40. Assuming you start working at age 20, you’d need to save $100,000 per year for 20 years.

Assuming you live a lifestyle similar to what you expect in retirement, you’d need to earn a gross income of around $200,000 per year. Here goes the math:

  • At $200,000, you can expect to pay around 25-30% in taxes. That leaves you with $140,000-$150,000.
  • $40,000-$50,000 of living expenses
  • That lives you with $100,000 saved up.

While a few jobs can allow you to earn this much, it’s unlikely for most to earn such a high income at such a young age.

And that’s where investing comes to the rescue. Sure, you need to work to start earning and saving money, but this money should not sit idle and it should also work for you, so you can reach your goal. Investing will help you boost your income, until it eventually gets you financially independent.

Let’s consider a few scenarios to see how they compare. The first year we start with $5,000 and each year after that we assume the following:

  • Saving $5,000 per year
  • Saving $5,000 per year and investing half of the money at a 7% yearly return
  • Start saving $5,000 per year, and each year increase the saving by $1,000 (So the first year we save $5,000, the second year $6,000, the third year $7,000 and so on and so forth…)
  • Saving $5,000 per year and investing all the money at a 7% yearly return
  • Start saving $5,000 per year, and each year increase the saving by $1,000, investing all the money at a 7% yearly return

Here is the evolution over time:

By saving $5,000 per year, after 40 years you’ll end up with $200,000. Not too bad, but not enough to retire comfortably.

If you just invest half of the money each year, you’d double the money getting slightly over $420,000. It already shows how important investing is.

Now, without investing, but by increasing your savings by $1,000 each year (either by getting a raise, changing job or starting a side hustle), you end up with around $940,000. And this shows how important it is to increase your savings as your income grows.

Then, going back to the $5,000 / yr savings and investing everything, it beats increasing the saving rate and you’ll end up shy of the $1 million mark with around $998,000. Again it shows how important investing is as far as growing your wealth.

Finally, combining both the increase of savings over time and investing show the power of compounding and we’d end up with over $3,000,000 which is more than 3 times the next best results.

Now that growth happened over 40 years and this shows the importance of starting early. The earlier you start, the easiest it will be to grow your portfolio leveraging the compounding effect.

Now 40 years is still a long time, if we want to reduce the time it takes to reach our goal, whatever it is, we realize how important it will be to save aggressively to bootstrap the investment growth.

Categories
Financial Literacy Investing

What Are The Main Investment Types?

We’ll try to list the main investment types out there, how they function, i.e. how do you make money from them and we’ll try to classify how passive they are and the usual expected volatility.

What Are The Main Investment Types?

1. Real Estate

There are several ways to invest in real estate, from land acquisition, land development, single family rentals, multi family rentals, office rentals, industrial rentals. While there are a lot more hybrid investment types from house hacking to vacation rentals, we’ll only go through the main investment types in this introductory post.

1.1 Single Family Rentals

This is probably the most straightforward investment type in the real estate space: acquiring single family homes and rent them out. The business is simple: rent the home and maintain it in habitable condition for the customer.

The owner of the rental also may also profit down the road by selling the property for a profit if it appreciates.

1.2 Multi Family Rentals

Similar to single family rentals, but the asset is in general an apartment building. Duplexes and triplexes, smaller buildings, also qualify as multi family.

1.3 Land Acquisition

This is usually an appreciation play, where one would simply acquire land hoping to sell later in time, for a profit, if the land appreciates in value over time.

There’s one main exception regarding agricultural lending, where one can lend its land to a farmer to exploit the land. The owner of the land receives a rent and in exchange the farmer can exploit the land growing crops or farming livestock.

1.4 Land Development

Land development consist in acquiring raw land and developing it, usually bringing electricity, water and sewer to sell it to a real estate builder to then build and sell buildings, often multi family or single family homes.

1.5 Office Rentals

This is similar to multi family rentals, in the sense that this involves usually bigger buildings, however they’re usually leased to companies or specialized professionals.

1.6 Industrial Rentals

This is similar to office rentals, but concerns industrial buildings usually leased to companies. In this categories we usually have warehouses or industrial buildings able to house machinery.

2. Stocks

Stocks are usually fractions of a company traded on an exchange.  By buying the stock, you buy a fraction of said company.

2.1 Regular Stocks

By buying the stock, you expect the company to do well and have its share price increase to later sell it for a profit.

2.2 ETFs

ETFs or Exchange Traded Fund are usually funds that invest in several companies/stocks or track some indexes. It allows you to own a pool of investments without the hassle of having to buy every single one of them individually.

Similar to stocks, you’d buy the ETF expecting it to go up in value to sell for a profit.

2.3 Dividend Stocks

Dividend stocks are stocks that pay a dividend, sometimes monthly, but usually quarterly, as long as you’re holding the stocks. These stocks are usually from more established companies, with proven business models, where the growth of the stock usually lower but compensate for it with its dividend.

Dividend are taxed differently than capital gains from selling stocks for a profit and can be interesting in that regards.

Also several dividend companies tend to increase their dividend over time. Dividend aristocrats are dividend companies that have increased their dividend for at least 25 years.

2.4 REITs

REITs or Real Estate Investment Trust are companies that invest primarily in you guessed it, real estate. To qualify as a REIT must have at least 75% of its income derived from real estate and it must distribute at least 90% of its taxable income as dividend to its shareholders.

REITs income is usually taxed as income, unlike dividends and based on your tax bracket, it may be advantageous to hold them in tax preferred accounts such as a 401k or an IRA.

3. Bonds

Bonds are loan to a government (government bonds) or to a company (corporate bonds) for a certain period of time (maturity)and you receive interest (the coupon) , until the loans matures at which point you receive the principal payment.

4. Leveraged Financial Instruments

4.1 Options

Options, commonly on stocks, but can also apply against other financial instruments, are just that: option (not obligation) to buy (call option) or sell (put option) at a given price (strike price) until a certain time, the expiration date.

These investments are usually more volatile and riskier, because of the leverage builtin into the contract.

4.2 Forex

This is the currency market, where ones can profit from the gain of a currency against another. While usually reserved for more advanced investors, the concept is often eye opening that whatever you own that changes in value is a paired trade. When the USD/JPY forex pair trade goes up it means the US dollar goes up against the Japanese yen. When your home goes up in value, it means your home value goes up against the dollar. At which point you want to ask, is the house gaining in value or is the dollar losing in value?

Forex symbols are usually traded with leverage which can increase the risk if not managed carefully.

4.3 Futures

Futures are contract, usually on commodities but also on stock indexes and currencies. The contract establishes the price of an amount of a commodity at a certain date, e.g. The June 2020 Gold contract, at $1583, establishes the price of an ounce of gold by June 2020.

The market allows producers of such commodities to lock in a price for their production, while speculators, often blamed for commodities volatility allow the market to exist in the first place.

While not perfect, it should be noted that the existence of the market allow producers to hedge their production and many producers would not be in business without the existence of the futures market.

Futures , like the Forex, are usually traded with leverage which can increase the risk if not managed carefully.

5. Alternative Investments

This involves structured financial products in various area, such as art, real estate, marine, legal… It often involve lending money to a third party using various assets from the third party as collateral.

It’s usually reserved to accredited investors, i.e. investors earning more than $200,000 annually if single ($300,000 if married) or have more than $1,000,000  in assets excluding the primary residence. Or institutional investors like investment banks, pension funds and so on.

6. Private Equity

Private equity is generally speaking part of the alternative investments class, but probably deserves a note of its own. Like for alternative investments, these investments come mainly from accredited investors or institutional investors. There are 2 main segments in private equity: one for early stage companies or startups, one for later stage companies and distressed companies.

6.1 Early stage companies or startups

That’s usually where venture capital and angel investors come in. They will pool money or invest their own money to help develop early stage companies, usually in the hope the resell it at a higher price to a bigger company or take it to the public market, where they can exit their position.

The game in startups investing is that most of your investments will go to zero, but the few who survive will make a disproportionate amount of money.

If you want to put some rough numbers, successful startups investors, often see 90% of their investments go to zero. 9% percent of their investments get a 10-50x returns. And 1% turn into a 100-2000x returns and sometimes more.

The downside is that there’s usually no liquidity, so it’s very hard to liquidate your holdings and it’s usually a long game. It will take usually more than 5 and often around 10 years for those early companies to mature to the point where you can expect those enormous gains.

6.2 Distressed companies

Another side of private equity is to invest in failing or distressed companies. Investors usually buy the debt of a company at a steep discount and will try to turn the management around and eventually turn it into a profitable company again, so they can eventually collect the debt repayment.

If that ideal scenario fails and the company is forced into bankruptcy, investors will try to recoup some money during the bankruptcy process.

7. Institutional Investments

This are types of investments reserved for institutions (e.g. CDS), usually due to the amount required to participate in such investments which can range from several hundreds millions of dollar or billions of dollars and sometimes require special licenses to be allowed to participate into such investments. We won’t discuss much about these but it’s good to know that they exist because they can have some influence into other types of investments accessible to the general public.

Conclusion

We’ve presented most of the common investment classes. As far as building a passive income portfolio, we’ll talk more about rental real estate and stocks. We’ll also touch upon alternative investments and also discuss some opportunities with leveraged financial instruments when they arise.