As of the date of this article, I am using all of these passive investing strategies to build wealth and increase my net worth.
I’m telling you this to let you know that I am putting my money where my mouth is.
Also, if you don’t have money to invest, check out my money saving tips for increasing capital for investing.
In 2008, Warren Buffett bet $1 million that hedge funds couldn’t outperform the simple S&P index fund over the next 10 years.
How’s the bet going now?
Buffett’s recommended index fund is up 66% since the bet’s inception.
The undisclosed hedge funds are up 22%. (1)
Even if the hedge funds pull it off last second, the point stands that very few funds outperform the market.
So barring access to any of the greatest hedge funds, the best option you have is most likely investing in the market.
This is great news for the lifestyle entrepreneur.
This option consists entirely of passive investing and has very low fees.
You see, from 1950 – 2009, the S&P 500 has averaged a 7% annualized return with dividends reinvested and adjusted for inflation. (2)
That isn’t bad at all especially if you’re investing for the long-haul (>10 years).
But we also know that there were long stretches in this nearly 60 year period where the market moved sideways.
This means the value of your investment in an index would be flat or would decrease significantly before rising again.
Again, this might not matter in a retirement account if you aren’t planning on withdrawing from it for 30+ years.
But sometimes, you want to earn a “reliable” return on a smaller time scale (<10 years).
For example, I’m currently socking away $800/month for a home.
I could put that in an index fund and possibly have lost money after a decade (sad day).
Or I could put it in a bank account where it wouldn’t even keep up with inflation (still sad).
Or, I could invest in…
1. Passive Investing with Lending Club: Unsecured P2P Lending
What is it?
Lending club is a peer-to-peer lending platform where investors provide funding to individuals looking to take out an unsecured loan.
Investors can pick the individual loans themselves – viewing the credit history of the prospective debtor and other loan data.
Or the investor can automate his investing.
This is when he allows Lending Club to apportion the money in his investing account according to basic criteria.
The automated option is great for people who want their investing to be entirely passive.
It’s what I am personally doing with my Lending Club account.
But if you’re like me, you’re probably also wondering about the “unsecured” aspect of the loan.
Yes, that’s right, if the borrower defaults (or doesn’t pay back the loan) the lender has no recourse and loses the money he loaned to the borrower.
This might sound incredibly risky, but with diversification it doesn’t have to be.
In fact, I think it’s less risky than investing in the stock market (even in an index).
Because what really matters is the net rate of return taking into account defaults (people not paying back the loans).
Lending Club publishes statistics where you can view loan information like this.
But this screenshot captures the highlights of the data showing loan returns from inception in 2007 to Q1 of 2016.
These returns are impressive especially when comparing them to the average return of the S&P 500 index.
But what’s really impressive about Lending Club is the sort of returns its investors earned during the 2008 financial crisis.
You can see in this side by side chart that when the S&P 500 was down more than 20% from 2007 to 2008, investors’ returns in Lending Club’s lowest grade loans were down only 2.23% for the same period.
This is why I think P2P lending actually seems less risky than investment in the market.
Because there seems to be a lower probability of permanent capital impairment (or loss of money).
With passive investment in unsecured P2P loans it’s extremely unlikely you will have the soaring 15%+ annual returns of the S&P 500 over certain decades.
But with these returns also comes the
risk inevitability of down years.
P2P lending on the other hand, offers a more reliable opportunity for consistently positive returns for the investor interested in passive investing.
Maybe you’re saving to purchase a house too,
Or you might be uncomfortable with the inherent risk of the stock market,
Or maybe you want to diversify with an interesting asset class.
Whatever your investment goal, P2P lending is worth investigating.
If you want to take a closer look at P2P lending, check out lendacademy.com.
2. Passive Investing with Groundfloor.us: Real-Estate-Backed Investments for the Common Man
For the investor looking for the possibility of greater gains and of course more risk, groundfloor.us is an interesting option.
This company provides funding in the same way that Lending Club provides funding.
They match individuals looking for a loan with investors seeking a return on investment.
However, on Ground Floor the maximum loan duration is one year as opposed to the three to five year loan terms on Lending Club.
I really like this aspect of Ground Floor investing which allows you to have an opportunity at least once a year to reevaluate your investments and pull out your money if necessary.
Another major difference between Ground Floor and Lending Club is that Ground Floor’s loans are limited to real estate and are secured by their underlying real estate.
So borrowers on Ground Floor take out loans specifically to rehabilitate a property or construct a new property.
If the borrower defaults and doesn’t pay back the loan, Ground Floor acquires and sells the property to satisfy the debt.
Normally, investments like this are limited to high net-worth individuals.
But, thanks to recent changes in investment law, Ground Floor has made this opportunity available to any investor.
These recent legal changes mean that companies like this haven’t existed for long and therefore don’t have the sort of loan data that Lending Club or other P2P lending companies have.
As such, it’s a riskier option than Lending Club in my opinion.
My current investments on Ground Floor have a projected weighted average return of 14% 12 months from investment.
But I don’t have historical loan data like that of Lending Club assuring me that gains are possible even after defaults.
I’ll be very interested to see how these loans turn out and will keep you updated with their results.
In any case, Groundfloor presents a unique investment opportunity that is full of opportunity for the non-institutional investor.
3. Old School Value: Automated Value Investing
Old School Value is the name of Jae Jun’s blog.
It’s where he discusses value investing and his path from an engineer with no background in finance to a financial software creator.
You want to know the crazy thing?
He has averaged just under a 20% annualized return over the course of his investment career.
In short, Jae is an investment hacker.
With his software and blog, anyone can emulate his results given the drive and desire to do so.
Jae has converted much of the wisdom gleaned from his study of the greatest value investors of all time into a web app and corresponding macro-enabled excel workbook.
These tools enable the user to plug in a stock ticker to generate a fair value estimate of the company along with an ideal purchase price.
If all this sounds foreign to you, you can find more details about value investing on his blog.
But since this blog post is all about passive investing, you can also mechanically buy and sell according to Jae’s plan here and potentially earn an annualized return of 18.6%.
At least, that’s what this mechanical portfolio earned in a hypothetical back test over the course of 16.5 years.
Of course, with this potential for upside comes the equal and opposite potential for downside
This is evident in his back test which includes one year in which the hypothetical portfolio was down 43%.
It takes nerves of steel and a strong conviction in your investment strategy to be able to watch your portfolio’s value drop by nearly half.
Nevertheless, it’s a fascinating tool and one that I’m currently using to evaluate stock purchases in my own Roth IRA account.
Maybe you followed some of the advice from my blog post about saving or maybe you’re just looking to retire early (or at all).
Regardless, I hope I introduced you to new passive investing tools that can increase your wealth.
How do you invest your money?
I’d love to hear about it in the comments.