Wednesday, 13 July 2016

Passive Income is a Myth

Many so-called passive incomes are not entirely passive. If you happen to see how most people invest, you will know where I am coming from. Most of them are not guaranteed returns and we shouldn't expect to receive it on a regular basis, nor the capital preservation. Here is the definition of Passive Income by Wikipedia: Passive income is an income received on a regular basis, with little effort required to maintain it.
Here are common "passive income" people talked about:
  1. Dividends
  2. Property rental
  3. Bank saving interest
  4. Bonds/fixed deposits
I will not assume my dividends will come in on a regular basis. Dividends are declared by the company yearly and it is not guaranteed. There is no capital preservation too. I know, some hard nuts will say buying good companies is a natural process for dividends or/and capital growth. I love their convictions. We are just playing with probabilities. Watch your numbers.

Property Rental
Can you guarantee your investment property will be fully occupied 6 months down the road? How about the capital preservation? Many of the investors benefited from rocketing properties prices, decades after decades. Most people will think buying properties is a natural process to exponentially grow your wealth, especially with the leverage. Well, it has been really good, but there is still no guarantee. Again, we are just playing with probabilities. Watch your numbers, again.

Bank Saving Interest
Enough said? Bank saving interest will fluctuate (Anyway, most of the rates are quite pathetic already).

Bonds/fixed deposits
This type is definitely most passive and guarantee, unless the owners go burst. Just don't expect high yield. 3-4% per year is already considered good. There are negative rates in a few countries. You may lose out to inflation along the way.

So, all dreams shattered? Financial independence is nothing but a gimmick sold by the financial experts (at least the so-called experts)?

If you have enough money and cash flow, you have achieved financial independence. For example, if your household expenses is $30,000 per year and you have yearly income of more than $30,000, you are somehow there.
If you are solely depending on the so-called passive income, please put in some buffer. How much buffer? I wouldn't know. It is your comfort level. Maybe, 50% more? Expenses of $30,000 will need income of $45,000, in case of rate cut. If you still cannot sleep in peace, maybe living on passive income is not your cup of tea.

Another method will be using the capital draw-down style. Try calling Mr Bill Gates and ask whether he need passive income to be financially independent? If your capital is huge enough to last you a lifetime, there is no need for you to be so fixated at "passive income". For example, if you only need $1 million of cash, lifetime, you know that the $2 millions in your bank account is somehow sufficient.
If you coupled with the "passive income", it will work as your capital preservation, hoping you will never need to draw down the $2 millions by living on the interest earned. Again, who will eventually spent the $2 millions? Pass down generations by generations? Are you so sure that your descendants will be a better person with the inheritances? Will it deprives their survival instincts? Leave it to you to think about imparting the right values to your beneficiaries. Having inheritances are definitely a bonus, but values are more important. Maybe there are no correlation between the two. In my opinion, excessive wealth is useless. You may ask, Frugal Daddy, are you on your right mind?

Do remember to do personal hedging. In a more familiar term, it is called insurance. How much is enough? Only you will know. Maybe an amount that can last your family for >10 years, but a premium of <10% of your income will be a good estimate. Not all events can be covered by insurance, so you need more money for self hedging.

I am surprised by people chasing after money as if it is a life goal. Don't end up chasing after the moon in the river, after 50 years, realised you have wasted your life. If money can solve the problem, it is not a big problem. I know, if there is no money (it is a big problem!), we may not be able to focus on the essentials in life. However, It should never be the main focus, it is a commodity. If you crack your head harder, maybe, the money problem you think you have, need not be resolved by money. You may ask again, Frugal Daddy, are you on your right mind again?

Passive income is a good concept, it makes your money works for you, but it is not entirely passive for most instances. Make sure you strike a balance, because time is a more important resource that you have, and you can't have excessive time. I can guarantee you there are plenty of richer people out there hoping they can have more time than money, and they wish for a different youthfulness if there is a restart button.

There is no restart button, stop looking for it. Live your life now.


  1. If we talk about consistent income, then our monthly salary is not either as our job can go the next day.:)

    Passive as it means passive, not consistent. Relatively much lesser effort. Is up to us to manage the passive acceptable consistency levels.

    1. Hi Cory

      You are right on the job security, ppl may lose their job or received pay cut.

      As mentioned in the post, Passive income is a good concept, it makes your money works for you, but it is not entirely passive for most instances. Many of them could be better off using the same time to do part time job.

      One day, the dividend may abruptly cut to zero, or in another form, rights issues, then there is no expectation to begin with. ppl may encountered few if their horizon is few decades.

      We have to be positive, but most advocate passive income as if it is really passive and guaranteed.

      There are some methods to really have passive income as mentioned in my post. If your base is very high, say 3-5 millions, having a basket of 3% bonds may give most ppl the lifestyles they are enjoying now. Then it is truly passive income

  2. I think is depend on individual on how much money they need in order to achieve their financial goal. I agree with you on the part on the consistent passive income for the various tools that you have mention. I also have some concerns about the passive income which I have wrote a post here:

    However, I still believe in passive income (not taking it as a myth) but taking it as a unpredictable income (cause your passive income may fluctuate). Not sure whether we should put consistency when it comes to passive income, because nothing is for sure (as Cory mention, salary is not fixed either)

    1. Hi James

      Indeed. Like my reply to Cory, passive income in English mean not doing much and get regular money consistently. Most instances are not. Recent years, ppl are selling passive income like pancakes.

      Unpredictable income or additional income could be a better term. Provided the person get more than what was invested. Haha.

      I am not writing it off but more to give a realistic picture

  3. Yes and no.

    That is what I learnt over the last 16 yrs in short-term trading and long-term investing.

    Passive income in the form of SUSTAINABLE cash flow in the stock market may be found in big bear market. It is not a myth and available to those who have gut and patience.

    1. Hi CW

      Agreed. That is near perfect timing the market. But most "experts" will say stay invested.

      As my replies to the 2 gentlemen above, additional income is a better word, provided you didn't suffered capital loss eventually.

      Having gut and patience may not be sufficient, some forms of knowledge is needed too. Else anyhow bang the wall :)

  4. Thank you for this post, especially the last two paragraphs. All this finance stuff is an important part of life for sure, but not the end goal of life.

    Allow me to quote someone not very famous (Alexander Green) -

    "You see, money is not your most precious resource. It’s time. Your time is limited, perishable, irreplaceable and unlike money, cannot be saved."


    1. Hi Kevin

      That is why you do bogle style etfs. May you be rewarded with both time and money, more passively hopefully

  5. Replies
    1. Haha. Nice one. If the only path is blocked by the wall, crush or overcome it!

  6. Hi FD,

    Actually nothing is guaranteed in this world if we think this way. Husband and wife can divorced, children can be disowned, and like Cory mentioned, jobs can be gone!

    I just think paranoid but confidently is necessary, but we (I m not saying u) also cannot be over skeptical.

    As long as we use our knowledge and experience wisely, and calculate the risk properly, passive income is possible.

    We always need to extrapolate over long time and then see the overall returns, and cannot just base on a one off event.

    I do believe that if have many estates or many stocks, passive income is still possible as long as for eg out of 10, there are more winners or the winners are larger or u just dun lose as much!

    1. Hi Rolf

      Agreed. As my replies above. Hopefully the person have more winners than losers!

  7. Put it simply,
    You can only safely say you really have arrived (financially independent) if you can live on the income of your interests on the interests...........
    W B or B G?

    The rest of us are just too happy if we have assets to manage carefully to generate income for our daily living when we have no more HC left lol!

    Until you reach that stage you don't know what it is lol!
    Now you just think and write what it is like lol!

    1. Hi Temperament

      You belong to the school of hard knock. Work till no more hc. Haha.

      There are differences between financial independence n financial freedom or abundance. Wb or bg are financially free. Multi millionaire should be financially independence if their lifestyles not overly luxury.

      Indeed, I am writing based on what i believe. :)

  8. an interesting point of view...........
    i would say the only thing consistent is "Change' and that itself present both opportunities and threats to the investment market. Some can make huge profits in a bear market while others can lose in a bull market as well.

    Maybe it is better to say the sources of passive income has to be diversified after a while. The landlord that makes money from property rental may after years start to acquire cheaper properties in a low interest environment, rent it out , collect rental income with the hope of price appreciation down the road. IF it goes well as planned, a few times of flipping would get this guy into the financial freedom stage.

    For those of us who missed this season or lack the capital to play this high capital game, there are always the stock market, forex, internet marketing , etc that offers its variety with both different level of risks and gains involved.

    Thanks for the interesting article.

    1. Hi Mr Chua

      Thanks for your addition to my post.

      Well said, change itself is inevitable.

      It is capitalism after all

  9. Wow, so many comments!

    My personal view is passive and guarantee are two separate issues.

    I guess unless you have a big base (i.e. >$3million), it is hard to find to live on passive income that is "more or less" guaranteed.

    For those that love to "prospect", the dividends can be quite "passive" since the effort is minimal.

    My view is if there is enough diversification, "passive" of around 3%-4% can be >90% achieved.

    1. Hi Friend!

      Guarantee and passive may be 2 different things, but passive income as a whole involved regular and predictable income with little effort. then it has to do with high level of guarantee.

      As the "experts" usually say: "historical data is not an indication of future performance". Sounds familiar?