Have I perverted the term passive income

There is a post that I saw by Jared Seah on passive income that I thought I will share it with readers: What is passive income?

One of the things that I kept hearing again and again in various wealth building conversations is the idea that they channel more and more to stocks and shares or property to get passive income.

Some how or rather people are sold the idea that building wealth is rather easy. There is that magic pill that allows you to get something and reap the benefits without doing much work work.

Jared highlight the best example of someone enjoying dividends by virtue of having a certain surname. That is rare.

Have I perverted the term passive income HcGUHmu

Most wealth building vehicle is hard to be truly passive. In all wealth building there tends to be 2 levels of work: the initial upfront effort to build up the competency, and secondly, the recurring maintenance effort, of you doing it again and again.

There are seldom things that are truly passive.

I put up this table above in some of my articles where I articulate properties, ETF investing and traditional savings as more passive. It is hard to sell this table, as there will be the folks that argue to no day no night that they have such a magic pill.

My experience with what i found out is the maintenance effort for properties can be limited to yearly if not the occasional rejuvenation of the property. One would properly be more passive, if you have a portfolio of it, perhaps you will engage a manager and thus it becomes more passive.

A passive stocks and bonds portfolio involves channeling more to the portfolio with a quarterly or annual mechanical rebalance. It is still work, but because you are following a mechanical system, it is more passive compared to the other wealth building vehicles.

Even traditional savings require you to look up better deposits or money market funds to redeploy them.

At the end of the day, I hope I didn’t oversell this in the past as If there is some magic golden goose that you can just buy and don’t do any work..

In the last part of his article, Jared highlights what I think might be a similar observation, that is, “passive income” is very prevalently used to sell courses and it seems most of the time, the main benefit to the course participants is NOT the knowledge to build a system to prospect and identify your own stream of income, but to be part of the mastermind group to lich the good businesses that the folks training them provides.

They trust the picks and they reap the income provided by the picks. Now that is truly passive.

Jazreel Low only got back $2,000 from her $200,000 stock investment in 1997

Jazreel Low only got back $2,000 from her $200,000 stock investment in 1997 SqIWtbh

Me and My Money is a section in the Sunday Times where they interview many successful people so that readers can perhaps be, inspired to learn from them.

Often I find that most of the successful people are property agents and business owners. It shows how difficult to become successful in life as a person building wealth with stocks and bonds.

This week they interviewed ex-actress Jazreel Low who was part of the first Star Search with Zoe Tay (if my poor memory serves me correctly)

Jazreel is more of a business owner nowadays and a pretty successful one at that.

We try not to post the full article but perhaps I can summarized a few interesting part of the interview

  • She came from a big family where she had to help up in the family’s bicycle manufacturing business. Money was hard to come buy and they can only spend on the necessities. She went through the same experience as a lot of us, teaching tuition, taking on part time jobs, even the ones I did before, hamper packing
  • She is more of a spender instead of a saver. The thought of saving only entered her mind when her daughter was born 11 years ago, at 36 years old
  • She got started investing with the influence from friends, where a couple of them were remisiers. She suffered her worse loss (she described that she lost her life savings) in 1997 which coincide with the Asian Financial Crisis where she put in $200,000 and only manage to get back $2,000. She says “I realised that unless you have the time to monitor and know what you’re buying, don’t go in. I was just following my friends, not knowing what I was doing.”
  • She also shared her bad experience with investing in properties in China, investing in an apartment after hearing that there are easy money to be made. “Strangers just took over my apartment and lived there, squatted there. I wasn’t familiar with the legal system, and somehow we couldn’t get them to move out. So I had to sell it, at a loss. I just wanted to get rid of it.”
  • Due to the trauma she have not held any stocks and shares since. She prefers to stick with things she knows and more “passive” things like property and endowments which she can monitor
  • She did very well in business, selling off successful bridal shop and music production house and currently operating a spa chain and eateries in Bishan
  • She doesn’t have the luxury handbags indulgence of most ladies but instead are rather weak against gadgets which she has to hid how much she spent from her husband
  • She lives in a semi detached house bought 7 years ago at 1.5 mil which is likely to worth 3 mil now. She also owns a three bed apartment at The Lakefront Residences with her mother and sister and drives a Mercedes Benz A Class Hatchback

 

I find that there are a few take-away from the article.

Fear of bad memories

Many people steer clear of traumatic events in their lives. After it, they want nothing to do with it. It is not just restricted to wealth building. My colleague refuse to eat sweet potatoes after being forced since young by her mom to eat it to the point of vomiting. No matter how we encouraged, she won’t eat it now. Same for bad experience with dogs when young.

It must be real bad to see all you own dwindle from $200,000 to a fraction of that. Those that have been through some of the bad crisis would tell you it is very difficult to prepare for it.

But it might make you steer clear from it. Never to touch it again.

Some of the worse outcome is that it might create some fundamentally flaw plans due to this experience or plans that are not well thought out, such as “Next time to be safe, I will move 100% to cash and then get back in, instead of stupidly holding and watching it go down”

The bad experience not just affected single individuals but also the people in tune with the topic. Those that did not suffer also learnt from it, and it would seem, lost a bit of rationality there.

The rationality is that it is difficult to predict the magnitude of drawdowns, or for the matter when they will happen.

It resulted in the best case study in 2011, where due to the European PIIG crisis, the local market dropped 19%.

Due to how close this even was from the 2008 crisis, every big drawdowns of 10% magnitude, which normally looks okay, looks like the beginning of a 50% drawdown.

Many were sure the magnitude of the drawdown would be like the 2 crisis: at least 50%.

Many were happy that they are in 100% cash.

Turns out the market didn’t go any lower than that. The biggest mistake that people failed to learn is that you can be overweight in cash, BUT you cannot not get back in at good prices. This second part is about magnitude and its hard to tell.

Perhaps a more systematic plan would help better. Read the important part of a market crash.

Knowing what you are doing (really)

The temptation of easy money is hard to avoid and we hear this even in office as the society gets more sophisticated.

To put almost all your savings into stocks and shares or something that builds wealth, say Land Banking, Property, Startups, you need to know what you are channelling to well.

Often, do have a hard reflection and assess if you have achieve a level of competency to divert such a large amount of your wealth building fund to a single endeavour.

We do not know Jazreel well, but from the account given, she might not have a good investing system to begin with, garnered by investing time and effort to build up knowledge to implement the system.

Most would advocate diversification, but I disagree to a certain extend that if you felt that you really have a competency, then go ahead, proceed with a good system

People look at a Stock Market really differently

Jazreel have shown to be a great business owner and operator. To be successful in not just a single business type but as diverse as Bridal, music production, eateries and health related is astonishing.

I wonder why she couldn’t look at stocks as how she would look at businesses. Perhaps without the right mentor and guidance, she would not have awaken to look at stocks as similar to how she would run her businesses.

Or perhaps the market is as treacherous as she make out.

There are traders, short term and long term, they are the fundamental investors, but mostly they are made up of people with hased up plans or lack of any plans.

Its never too late to get started

She really got started at 36 years old, but i wonder if that is a bit misleading since, how did she lose 200k in 1997? Perhaps memories are faulty.

I have friends who realize the virtues of savings or wealth building late, and they lamented that they should have started some time ago.

We can’t always turn back time but take the cue from Jazreel who showed that starting late but with good perseverance can still be rather potent. If you start at 31, you do still have a good 30 years to go.

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