5 types of passive investments to research

Well-known investor Kenneth Fisher famously said, "Time in the market beats timing the market." While trying to predict the market for the best trades can be enticing, a buy-and-hold passive investment strategy tends to provide better success for investors. And it's a strategy you might want to consider, especially when you plan to save for future goals like your kids' college tuition or their first car. Here's what your family needs to know about different types of passive investments.

What are passive investments?

Passive investing strategies use different types of funds to park money in and leave alone for a long time in the hopes of a rewarding profit. Typically you buy and hold these funds for a big savings goal like retirement or real estate purchases. This is a key difference between active vs passive investing, as active investing requires you to respond to market changes and make trades more often. Passive investors buy and hold over a long time, reducing trades. Active investors try to time the market for quick profits that may out earn the general market, while passive investors leave investments alone to build wealth over time. Active investors tend to incur bigger risks, while passive investments tend to see a steadier balance of growth and losses.

To safely make these investments, you need to be able to lock up your funds without needing access to the cash until your objective has been reached. The goal is to choose funds with good rates of return so that you make a profit through interest over time. 

Passive investments are a type of passive income, which is money that you make without having to put in daily labor to achieve it. Passive income stream options include investments like owning rental properties to earn extra money and are taxed like regular income.

Types of passive investment

Passive investment offers increased returns with decreased buying and selling in favor of holding investments long term. It is a way for parents and kids to earn money for future goals while diversifying investments. Passive investments are often structured like the broader stock market and mimic its success. Among passive income investment ideas, there are options to diversify between types of passive investment funds. As you build out your portfolio, consider researching index funds, dividend stocks, real estate investment trusts (REITs), treasury bills (T-bills), and bonds as possibilities to include in your passive investment management.

1. Index funds

One of the best passive income investments is an index fund. This group of funds — including things like mutual funds and exchange-traded funds (ETFs) — is composed in a similar distribution to a particular stock market. Investors choose these funds when they want to harness the investment potential they see in the wider market. By incorporating the types of stocks already doing well, index funds make up a portfolio with similar potential that you can invest in. Index fund fees are often less expensive because they don't require active management.

2. Dividend stocks

Like the sound of owning a company? Consider the passive investment strategy of purchasing dividend stocks. These types of investments buy shares in a company. As the company earns money, it pays out the profits as dividends to investors. 

Whether it's a bull market or a bear market, these types of companies regularly pay dividends because they generally earn a profit despite market trends. Investors can withdraw dividends to spend or reinvest them to earn more.

3. Real estate investment trusts (REITs)

Owning real estate is one of the most popular passive income strategies, but not everyone has the time or ability to become a rental property landlord. Instead, investors can take advantage of real estate investment trusts (REITs) as a passive investment strategy. 

Funds compiled with slivers of ownership of real estate, REITs may have a particular theme, such as residential apartment buildings or hospitals and medical centers. As the value of these properties increases with the real estate market, your portfolio grows.

4. Treasury bills (T-bills)

If you're feeling a little uncertain about trying investing, research T-bills. A highly trusted passive investment option, treasury bills are backed by the U.S. government. You purchase these at a discount on the face — or full — value. This essentially loans the government cash that it plans to pay you interest on in the future. At the time of maturity, you receive a payment of the face value. 

These can be a good short-term investment to park cash in for lengths from about one month to a year. As the government guarantees T-bills, they are ideal for investors looking for a low-risk way to earn. However, you may be able to earn a higher rate of return in other types of investments, so weigh your options carefully.

5. Bonds

Bonds are a lower-risk, lower-reward counterpart to passive stock investment often used to diversify a portfolio built primarily on stocks. You can buy bonds from companies or governments that need quick cash. Bonds have a face value, but you purchase them at a lower cost like T-bills. Then, when the bond matures, you receive the full value. You also receive interest payments throughout the length of the bond. Bonds tend to be longer-term investments, possibly held for decades.

Besides offering a relatively secure investment, bonds also make it easy to use strategies like a bond ladder. You build a bond ladder by purchasing a series of short-term bonds at increasing lengths of maturity. When the earliest bond matures, you use the interest profits to purchase a larger bond that will mature later than your original bond. This is a good way to pursue a long-term passive investment strategy without locking cash into a 10 or 20-year bond.

Start building your investment strategy today

You don't need a lot of money to get started with passive investing, just willingness to learn, knowing your risk tolerance and a financial goal. A common starter low-investment passive income option is a treasury bill. Other ways to get started with small initial investments are some index funds or individual stocks. 

Managing your money with tools from Greenlight can help you save more for an upfront investment. Make a plan to set aside some money to invest or even use the earnings on your high-yield savings account to start investing. When you use Greenlight, you can learn to invest in stocks and ETFs and save for goals like college tuition or your first car. And remember, time in the market beats anything else, so start today!