APU Business Original

Smart Personal Finance 101: Active and Passive Investments (Part II)

By Dr. Gary L. Deel
Faculty Director, Wallace E. Boston School of Business

and Dr. Karin Ford-Torres
Faculty Member, Wallace E. Boston School of Business

This is the fifteenth article in an ongoing series on sound tips for financial security and prosperity. Nothing in these articles is intended as formal legal or financial advice. Readers should consult with an attorney or licensed financial advisor before making any financial decisions.

In the last part of the Smart Finance 101 series, we talked about active investments, including business and rental ownership. In this second part, we’ll look at passive options for investment.

What Are Passive Investments?

Passive investments are those ventures that do not involve an active, ongoing effort from the investor. One example of a passive investment would be to become a “silent” or non-managing partner in a business. For this investment, you agree to help fund a business in exchange for a return on your money — usually through either a set interest rate or a percentage based on business revenue or profit.

If you’ve ever seen the television show “Shark Tank,” this is what the “sharks” seek to do with the entrepreneurs who visit the show. They want to use their money to back products and services that they feel will be successful, in exchange for a certain ownership interest in the businesses.

Of course, this kind of investment comes at a risk. If the business you invest in doesn’t succeed, you could lose everything you put in.

Another type of passive investment is to buy publicly traded securities on the open market — including stocks, bonds, mutual funds, annuities and other financial products. Securities come in a wide variety of types, values and risk profiles — they are far too diverse than we could ever hope to cover here.

For example, you could invest in an individual company that could either skyrocket or tank — yielding you massive returns or complete loss. Or you could invest in index funds that track the S&P 500 — these kinds of securities are much “safer” by comparison as they aren’t nearly as volatile as individual stocks. So you aren’t likely to lose your shirt, but on the other hand, you’re not likely to become a billionaire off these investments either.

In addition to publicly traded securities, there are also private equity investments available as well. For example, Fundrise and Realty Mogul are two private real estate investment groups that allow individuals to pool their money and invest in a number of different residential and commercial ventures including buying and flipping properties, developing new land, renting existing buildings, and holding loans for buyers. Minimum investments are normally required to participate in these kinds of activities.

There are also private funding sites for personal loans that investors can participate in. For example, Lending Club and Prosper are two groups that allow individuals to pool and lend money to others. Again, minimum investments may be required.

Investments Depend on Your Financial Goals and Risk Tolerance

Investment decisions will hinge largely on your financial goals and risk tolerance. But it’s important to note that none of the options discussed above are insured by the Federal Deposit Insurance Corporation (FDIC) so returns may vary and there is no guarantee that you will make money. In fact, there isn’t even a guarantee that you won’t lose everything you put in.

If you’re interested in guarantees, there are safer options, like the FDIC-insured certificates of deposit (CDs) offered through banks and credit unions. However, the safety of these investments comes at a cost. While your money is guaranteed to be safe and earn a set interest rate, that rate is usually very low — currently under 0.5% annually for one-year and five-year products.

There are many ways to make money and generate equity. It is important that you look carefully at your options to determine the best paths for your financial prosperity.

Knowledge is power, so taking the time to study these different strategies carefully before acting is essential. And of course, it goes without saying that you should consult a licensed financial advisor before making any decisions.

About the Authors

Dr. Gary Deel is a Faculty Director with the Wallace E. Boston School of Business at American Public University. He holds a J.D. in Law and a Ph.D. in Hospitality/Business Management. Gary teaches human resources and employment law classes for American Public University, the University of Central Florida, Colorado State University and others.

Dr. Karin Ford-Torres is an Associate Professor with the Wallace E. Boston School of Business at American Public University. She holds a Ph.D. in Business Administration with a concentration in Advanced Accounting and Financial Management. Karin teaches accounting and finance courses for American Public University, Purdue University Global and Colorado State University-Global. She has 24 years of prior banking experience with Bank of America.

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