Earn Passive Income- Ray Dalio and Warren Buffet Reveal the Secret

Note I am not a financial advisor I am only giving my opinions and information I have learnt about how to earn passive income from different sources (see the bottom of this article). There may be affiliate links in this article, read the full disclaimer here.

You don’t realise it yet, but in the next few minutes, you’re going to learn the BEST way to earn passive income.

The more and more you review this page the more you begin to find yourself amazed at how simple this method to earn PASSIVE income really is. 

This fact is verified by:

• Warren Buffet (Best Investor ever)
• Ray Dalio (Most successful hedge fund manager)
• Tony Robbins (Life guru- Author of Unshakeable)
• Andrew Hallam (Author of Millionaire Teacher)
• Jack Bogle (Founder of Vanguard)
• Carl Icahn (“activist” investor)
• Grant Sabatier (Author of Financial Freedom)

These names may not mean anything to you but let me assure you, these are the financial GIANTS equivalent of David Beckham, Beyonce and Leonardo DiCaprio!

Ray Dalio goes as far as to say that if he were to die tomorrow he’s shown his wife exactly how to carry on using this investing technique to earn passive income.

If you’re like me, you will be delighted to learn about this. 

So my starry-eyed amigo read on to find out.

Invest in Index Funds… Earn Passive Income

Rare thinking people like you already know that you still need to put in some TIME and EFFORT to earn passive income. 

As you read every word of this article, you will discover WHY investing in index funds beats individuals investing in the stock market or mutual funds. 

By the end of this page, you will realise how index funds are the easiest way to earn PASSIVE income than other forms of income such as from property or a business. 

Hold up… What is an Index Fund? 

Great question!

Here is the difference between a hedge fund, mutual fund and index fund:

• Hedge fund– Typically for high-net-worth-investors (HNWI). The fund manager can bet on both directions of the market (up or down). They charge a hefty 2% management fee and around 20% of the profits go to the manager
• Mutual fund– Public fund available to anyone. Managed by a team who buy stocks, bonds and other assets. They again charge management fees. This is VERY common in the USA.
• Index funds– This is a public fund that requires no “active” management. Basically, you don’t need to buy and sell individual stocks of certain companies, it will simply own all the stocks in the index (i.e. the 500 stocks in the S&P 500 index fund)

You may think that a 1 or 2% management fee is not a great deal. But in real terms, a 1% fee will cost you around 10 years of retirement income*.

Can you imagine investing your money without having to research individual companies or dealing with tenants and making a consistent 7% return on average each year? 

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How Our Wealth is Being Stolen

Isn’t it Possible to Get a Much Better Return Investing Somewhere Else? 

Does a fat dog fart?

In fact, check out “How our Wealth is Being Stolen” to see why it’s important to earn a better rate each year.

However, there are certain reasons as to why index funds are the most hands-off way to earn passive income:

• You don’t need to MANAGE them regularly (once a year is fine… if that!)
• You aren’t relying on tenants or other INDIVIDUALS to pay you
• Don’t rely on an individual COMPANY to do well
• You don’t need to keep RESEARCHING companies
• You cannot go BUST
• It can provide you with the ULTIMATE way to earn passive income (see below)

Simply put… investing in index funds is the closest thing you will get to truly earn passive income.

FACT!

But I’m Sure I can Beat the Market… Why use Index Funds? 

As you keep scanning over this report, are you beginning to see how index funds not only are the best way to earn PASSIVE income but also BEATS other methods of investing in the stock market?

Here are 6 reasons why:

1. Don’t Argue With the Facts

• The US stock market has averaged 10.16% annual return between 1920 and 2016 – (1) 
• The S&P 500 returned an average of 10.28% a year from 1985 to 2015 (if you invested $50,000 in 1985 that would be worth $941,613.61 in 2015) – (2)
• The average investor returned 3.66% during this same time (the result was $146,996 in 2015) – (2)
• A 15-year study in the Journal of Portfolio Management showed that 96% of mutual funds underperformed the S&P 500 stock market index fund – (3)
• Another study showed that 33 out of 195 (17.5%) mutual funds DISAPPEARED between 1979 and 1999. There’s almost a 1 in 5 chance that your mutual fund may go bust! And there’s no telling which ones they will be – (4)

As you can see, many studies have already proven that investing in index funds beats the average individual investor or mutual fund to earn passive income.

2. Beware of Mutual Funds Managers & Financial Advisors!

Let me tell you the story of meeting a financial advisor…

They will start by telling you that index funds cannot EVER beat the market. For example, if the US stock market had an 8% return then the US stock market index fund would make around 7.8% after paying fees. 

Are you beginning to notice that they forget to mention any of the stats above, especially that 96% of mutual funds have underperformed index funds?

They will explain that they have beaten the stock market by 10 per cent or more in the past…

But they forget to mention that a monkey randomly picking a stock that does well could beat the market by this amount.

They will go on to tell you all the reasons that their investment beats all other forms of investing and is the best thing since sliced bacon!!

Do you know why? 

Do you want to know the secret?…

They don’t make any money unless you use a product with them!

Remember that when you speak to a financial advisor it is unlikely they will have YOUR best interest at heart. 

They see a client and their brain screams “Show me the money!” Jerry Maguire-esk.

3. Avoid Paying HIGH Fees!

Here’s a fact for you…

It has been calculated that an average mutual fund will need to beat an index fund by 4.3% per year just to break even due to fees, trading costs, sales commissions and taxes. (5)

You can pay as little as 0.1% annual fees and easily under 0.5% using index funds to earn passive income. 

4. It Saves so Much Time!

If you want to actively trade stocks and shares you better be prepared to do what Warren Buffet does… 

Read about companies all day every day. 

Does that sound excessive?

Little by little you begin to notice that if you are not willing to do this you will lose in the long run vs index funds. 

Don’t believe me? Read reason #1 again. 

5. It Forces you to Buy low and Sell High- Leave Your Emotions at the Door

You’ve probably heard:

80% of investing in the stock market is psychological and 20% is technical.

This is the #1 reason why index funds win in the long run vs individual investors.

Vanguard index funds automatically rebalance your portfolio. But if you manage them yourself it’s a good idea to rebalance once a year (only do it more often if the stock market is going nuts!) 

Note for Expats- you will have to manage them yourself, read on to find out more…

Here’s a story about Anne in 2008:

Anne was sipping her coffee on September 29th 2008 when she saw opened the newspaper to see the headline:

“Congress rejects the bank’s bailout bill”

She knew that wouldn’t be great for the stock market so you know what she did?…

Carried on with her day as normal!

She knew her Vanguard index fund was due to “re-balance” in a few weeks time.

Anne had an index fund portfolio with 80% stocks and 20% bonds. The stock market tanked but bonds held their value. 

In November 2008 Anne now had 45% stocks and 55% bonds.

She still did nothing…

Her Vanguard Index fund “rebalanced the portfolio” back to 80% Stocks and 20% bonds. 

Because stock prices were falling off a cliff, the index fund sold some of Anne’s bonds and bought more stocks!!

Imagine the stock market crashing… what’s your first thought as an investor? 

That’s right “SELL, SELL, SELL” “Stop your losses!”

This is STUPID! Let me show you why:

You go to the supermarket and see your favourite blueberries cost £2 a pack. You always buy them so you chuck a couple into the shopping cart. 

Next week you notice that they are now ONLY £1. 

Do you decide you better not buy them?

NO!! 

You chuck in 4 packs and splash out on your porridge that week because they are ON SALE!

You’re clever enough to know that intelligent investors buy when the price is low and sell when it’s high. 

But because of human nature, it is VERY hard to do this when the media, you’re friends and the whole world is panicking about the stock market crashing and the financial system collapsing. 

And do you begin to notice the intelligent investor would buy MORE stocks and sell some bonds to do this! 

Investing is a place for your head only. 

Chuck your emotions out Hombre! 

6. You CANNOT go Bust

Just picture this for a moment:

You have been saving up for your retirement for years. 

You absolutely love the company Apple so you have £300,000 invested in their shares (over half your portfolio).

However, Apple has run up a load of debt and the new owners that took over who are bat s*** crazy. 

To make things worse Blackberry is making some ridiculous come back to storm the market again with their new phone that uses hologram technology. 

Apple stocks are tanking. 

In fact, they are about to go bust.

Your mouth goes dry, your throat is closing up, you smell that distinct smell of panic in the air. 

You realise your £300,000 is now worth £1,678.

There’s only one thing left to do… curl up in the corner and sob until you fall asleep.

You’re probably thinking this is extreme but it could (and has) happened to numerous companies that were “too BIG to fail”.  

Ever heard of…

• Enron
• Kodak
• Lehman Brothers?

Investing in index funds mean there is a 0% chance of this happening. 

If you are invested in the S&P 500 index fund then as soon as Apple falls out of the top 500 in the New York Stock Exchange it is automatically removed from your index fund and replaced with the company that is now in the top 500.

Unless every company in America was to go bust at the same time you CANNOT go bust if you earn passive income through index funds.

OK I Get the Picture, But What About the Next Crash? 

You’re smart enough to know it’s not if but when the market crashes. 

This FACT blew my mind!…

Over the course of 2005-2015, the Vanguard S&P 500 Index averaged 8% per year... This was during the financial crisis of 2008-2009!! (6)

Now, let me ask you a personal question… 

Do you think you could buy MORE stocks if the media and the whole world were panicking about the stock market and telling you it could cause a financial meltdown?

I know I would find it hard! This is why a typical investor in the S&P 500 averaged 6.37% during the same time frame.

Fear meant that investors stopped buying when the market was “on sale”

Now imagine you keep paying in the same amount every month to your index fund. It means you buy MORE units when the prices are low and fewer units when they are HIGHER!

e.g. Let’s say you pay in $100 a month into a Vanguard Index Fund. If the price of the index fund is $10 you can buy 10 units. If it has crashed and is now $5 you can buy 20 units (it’s on SALE!!)

It is for this reason that the Vanguard Retirement 2045 Fund returned an average of 7.39% to their investors between 2005-2015.

But the average investor who had a direct debit with them made 9.32% a year to earn passive income. (6)

A return of over 9% a year on average DESPITE the crash of 2008-2009!!

If that’s not enough then here are some freedom facts from Tony Robbin’s book Unshakeable:

• Corrections (fall by at least 10%) happen on average once a year since 1900
• Less than 20% of corrections turn into a “Bear Market” (fall by over 20%)
• Nobody can predict the market
• The stock market rises over time despite many short-term setbacks
• Bear markets have happened every 3-5 years, historically
• Bear markets become bull markets (see chart below)
• The greatest danger is being out of the market (see chart below)

The other main point is that in every year without fail the stock market bounces back after a bear market. Just see what happens in the chart below…

If you were not in the market after a bear market you will lose a big gain. And there’s no telling when the bear market will end. Just imagine if you waited until 2010 to invest again… you would have missed a 70% gain!

This fact is amplified when you take out the best performing days of the market. 

If you missed the 30 best days in the stock market over a 19-year stretch (6,935 days!) you would not have made a profit compared to the 8.2% market annual gain…

It’s impossible to predict when these best days will be so it just makes sense to always be invested in the market!

How Should the British Invest in Index Funds? 

Vanguard is the best index fund manager for one simple fact:

Their fees are the lowest!

…So get on it like a fat kid on cake!

Important note: There is no affiliate scheme for Vanguard so I have no incentive to promote them other than the fact they are the best index fund manager at the time of writing (January 2019)…

Here is the simple 2 step process:

1. Open a Vanguard account
2. Pay into a retirement fund 

To invest in a retirement fund with Vanguard you will pay 0.32% annual fee and they are very transparent about these fees helping to break down where you’re money is going (although it says it should be 0.24% on the previous page).

You can invest in different life strategy funds and individual index funds for different annual fees with different risk levels. 

Do you remember reading it is possible to but individual index funds for fees as low as 0.1%?

But here’s the truth… 

Morningstar studies report that DIY index fund investors usually underperform their funds because they often purchase high, sell low and speculate on market news. – Millionaire Teacher

So even though you could put together your own portfolio of index funds the simplest and often the best way to do this, in the long run, is to use the Vanguard retirement fund.

You can see the different target retirement funds above. 

It’s important to note that there’s no expiry date on these funds. They are just weighted more heavily to bonds if you want to “retire” sooner because bonds are supposedly less risky. 

So if you were a risk-averse 20-year-old you could still get the target retirement 2015 fund with 59% bonds and you can keep investing past 2015!

Equally, if you are approaching retirement at you can still invest in the 2065 fund with only 20% bonds.  

Here’s a fact for you:

• Stocks tend to outperform bonds in the long run (see chart below- note the 10 years column includes the great crash of 2008-2009)
• Stocks are more likely to drop in price than bonds (remember 2008 saw a 38% drop in the S&P 500)

What you need to invest with Vanguard UK:

• Be a British resident
• National insurance number
• UK Bank account details
• Minimum £500 lump sum
• Minimum £100 per month investment

So after your initial £500 lump sum you just need £1,200 a year to start investing in index funds, completely hands off.

You’ve got to wonder that if most people find the money each month to pay for TV, a phone and other gadgets, do you think it’s possible for ANYONE to find £100 per month?

And as you are thinking about earning a conservative 7% return per year you become really interested in this way to earn passive income. 

Just think about it… the key here is to invest for the long run. You need to forget about this money, for the time being, you can’t keep dipping into it or it will never grow.

How Should Americans Invest in Index Funds? 

Use Vanguard… Simples

Here is the simple 2 step process:

1. Open a Vanguard account
2. Pay into a retirement fund 

Apparently, you can invest for as little as $3,000 and it has by far the best rates and service (currently) compared to other products. 

It’s a very similar process as above- Monkey Simple

How Should Expats Invest in Index Funds? 

This one’s a bit trickier as it’s not currently possible to get a Vanguard account unless you live in certain countries.

So with help from Andrew Hallam, who is “the Don” on this exact subject, this is what you should do…

1. Open an account with Saxo
2. Buy ETFs (Exchange Traded Funds), which are very similar to funds that track a stock index
3. Keep your share allocation as you’d like it by buying more of the underperforming ETF

The costs are very reasonable per purchase. 

0.1% (£8 minimum)

Basically, if you can make purchases of £8,000 or more per go you will be paying the lowest commission fee % possible.

Obviously, this is not likely for everyone so it would be wise to keep commissions below 1% as much as possible. i.e. purchase over £800 worth at a time.

I even had confirmation from Andrew Hallam himself. 

Note- this is supposedly the most tax efficient method for a British expat to invest. If you are from the US or Australia then look into doing the exact same thing with your own local market for tax benefits, but please do consult a tax specialist for more information. 

The Ultimate Way to Earn Passive Income

Since you’re still here, I’m going to assume a few things:

• You are not a High Net Worth Individual looking to use a special hedge fund (yet)
• You’d like to earn passive income
• You would like to invest in the stock market
• You’re not willing to put in hours EVERY day to research companies 
• You have some disposable income that you could invest
• At some point, you’d like to retire and earn passive income to still enjoy your life

First of all, remember:

• The US stock market has averaged a 10.16% annual return between 1920 and 2016. 

Let’s say you earn passive income with a Vanguard Index fund of 80% stocks and 20% bonds that averages a conservative 7% a year. 

In this scenario let’s imagine you and your family can live off $50,000 a year. 

The aim is to reach your own financial “Figure” that you can invest to earn passive income that you can live off FOREVER.

It’s important to have a buffer in here to allow for inflation and to help the portfolio grow over time rather than taking all of the profits. 

So if you can take 4% of the investment pot, you should be able to leave the extra 3% growth in the pot to allow for inflation and an increase in your living expenses over time. 

Here’s the maths!…

Annual expenses/ Avg. return = Total nest to invest 

$50,000/ 0.04 = $1,250,000

(a simpler way is to times your annual living expenses by 25-30)

So a total investment pot of $1.25 million would be required to earn $50,000 passive income each year (FOREVER) at a 7% return… allowing for inflation. 

Now, I’m not gonna go off on a massive rant again about how much the average person earns or can save each year as I did in Dave Ramsey’s Complete Guide to Money review.

But let’s just imagine you can save $20,000 a year and invest it in index funds.

This would take you just over 23 years to reach your figure. Seems like a lot to ask doesn’t it? But maybe this is possible for you?

Wouldn’t it be amazing if there were ways to drastically reduce this time frame?

Imagine if you could earn $2,000 a month from property rental income.

Your figure would change:

($50,000-$24,000)/0.04= $650,000

Let’s also imagine that your side hustle of dog walking really kicks off and you are able to save $60,000 a year. It would now only take you 7 years to reach your figure. 

Are you beginning to notice the importance of having your own side hustle or finding different ways to make money?

This is the whole point of this website… To help you find your own side hustle that works for YOU!

If you are thinking this all seems a bit far-fetched! Don’t worry about it all at once.

The main thing is that you start investing whatever you can NOW.

The best time to have started investing was when you were born. The second best time is today

Pin this post to come back to it later.

Make Time Online Summary on How to Earn Passive Income

I know, I know…

You made 18% return investing in the stock market by yourself last year. Or you have beaten the market 9 years out of the last 10.

I believe you.

Now, let me ask you this:

Can you honestly tell me that it was all your knowledge that did this? 

Did you study the companies you bought shares of inside out? 

Do you know what the owner’s temperament and personality are? 

Did you know the company was undervalued?

Here’s the truth… you have probably ridden your luck. When the market is doing well, you will do well. 

But what happens when it’s not doing so well or your favourite stock goes bust?

If you enjoy trading the market, by all means, carry on. But do not fool yourself into thinking you are investing. 

You’re tactically gambling.

If you want a sure fire way of investing in the market then index funds will wipe the floor compared with any other technique over the long run.

Call a duck a duck and own what you are doing.

Your future self will thank you.

By the time you read this page, you will have found the easiest way to earn PASSIVE income.

This is your guide.

Save it.

Re-read it.

Use it.

Keep changing for the better

Mike

p.s. Apologies for the rant at the end, it was purely directed at myself for the future when I think I’m better than Warren Buffet again!

p.p.s. If you have any questions or thoughts please feel free to drop a comment below… or send me a message on WA here

Sources

1. Value Line Investment Survey- A Long-Term Perspective Chart 1920-2005 and Morningstar Performance Tracking of the S&P 500 from 2005-2016, www.morningstar.com
2. Tony Robbins, “Unshakeable- Your Financial Freedom Playbook“, 2017
3. David F Swenson, Unconventional Success, a Fundamental Approach to Personal Investment (New York: Free Press, 2005), 217.
4. Robert D. Arnott, Andrew L. Berkin, and Jia Ye, “How Well Have Taxable Investors Been Served in the 1980s and 1990s?” The Journal of Portfolio Management 26, no. 4 (Summer 2000): 86.
5. Mark Hulbert, “Index Funds Win Again”, February 2009, The New York Times, https://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html?_r=0
6. Andrew Hallam, “Millionaire Teacher- The Nine Rules of Wealth You Should Have Learned in School“, 2017
7. Grant Sabatier, “Financial Freedom”, 2019

*Assuming two investors start with $100,000 equal returns of 8% over 30 years. One pays 1% and the other 2% fees. With equal withdrawal amounts the investor paying 2% fees will run out 10 years sooner.