The English version is AI translated.


08.2020 Life Guide

Passive income starts with active investment

Far Eastern International Bank / Liao Guanjie
        Many people are talking about passive income. Every day when we turn to the financial column, we can see that the headline reads "saving shares for retirement" or "accumulating the first pot of gold through investment". I believe many people doubt: is investment really so simple? Can you increase passive income every month by saving shares? There are so many financial commodities on the market, how to choose? It is not easy to invest, and if you don't invest a lot of money, passive income can't support the family. However, the tolerance of investors to risk is also a crucial issue.

        Understand your own risk tolerance, and then choose investment tools

        For example, Wang Daming's saving habit is fixed deposit. Although it is a good investment way to deposit shares and receive dividends, the stock price fluctuates every day, which causes great pressure on Daming. Therefore, before choosing an investment tool, you should first know whether you are a relatively conservative or positive group. What's more, how much passive income is increased each month depends on the amount of capital invested.

        Increase revenue through bond investment

        At present, there are many kinds of commodities that can be invested in the market, including stocks, futures, options, funds, ETFs or structured commodities. What kind of commodities can we invest in to steadily increase passive income? Assuming that Daming has a fixed deposit of NT $1 million, based on the current fixed deposit rate, it can receive interest of 8000 yuan a year, and an increase of 700 yuan per month. In other words, it is a good investment if the average monthly increase in income exceeds the income of interest on deposit. Of course, this is only a comparison of the amount of income that can be increased each month, and the risk is not taken into account. Only by balancing risk and reward can passive income be increased healthily.

        For risk averse investors like Daming, it is advisable to consider products with similar fixed deposit characteristics, including: commodities with maturity and stable interest distribution, such as customized structured commodities, target maturity funds and bonds. Structured commodities are more complex. Although the target Maturity Fund has the characteristics of "no default at maturity and capital preservation in original currency", if there is temporary capital demand, early redemption may still have to pay a redemption fee. In contrast, bonds are more suitable for Daming. According to past data, the volatility of bonds is less than that of stocks, which can provide stable and definite income (fixed interest). Based on the 2.5% yield of the current U.S. dollar investment grade short-term bonds, the annual bond interest of NT $1 million is 25000 yuan, which can increase the passive income of 2083 yuan per month on average, which is 1300 yuan more than that of fixed deposit.

        Bonds provide loans to institutions (governments and companies) that need to raise funds, that is, to hand over the money to the government or company issuing the bonds, and return the original face value within an agreed period of time, during which regular interest can be obtained, commonly known as "coupon". The difference between bonds and stocks is that investing in stocks is mainly to enjoy the growth of corporate earnings, but bond investors can only get fixed bond interest. In the high growth stage of an enterprise, the profit of stock is better than that of bond, but it is difficult for ordinary people to judge when the enterprise is going down. The advantage of bond investors is that as long as the enterprise does not lose money, they can get stable interest. In addition, after buying bonds, it is not necessary to hold them to maturity. Bonds can also be circulated in the secondary market.

        Making good use of credit analysis tools to reduce investment risk

        Of course, bonds are not without risks, and secured bonds must be purchased, otherwise the original investment principal may not be recovered. Therefore, it is necessary to understand the credit risk of debtors (bond issuing institutions). Like borrowers, bond issuing institutions have their own reasons for borrowing, such as expanding business scale. Just as people apply for housing loans, banks will assess the borrower's ability to repay and whether there are other debts, so as to determine the amount and interest rate of loans that can be applied for; when buying bonds, people should also understand the reasons for issuing bonds, as well as the financial status and repayment ability of the issuing institutions. However, for people who have no investment experience, it is not easy to interpret the financial report and analyze the repayment ability. At this time, we might as well use the credit rating company with credibility.

        Credit rating companies will grade bond issuers, indicating their ability to pay interest and repay principal when they are due. US government bonds are often rated AAA or AA, which means that they are more secure than corporate bonds. Bonds issued by different countries will have different ratings due to geopolitical and political factors, national GDP growth rate or debt ratio. Bonds rated BBB or higher are regarded as investment grade bonds, while bonds rated lower than BBB are regarded as high-yield bonds. For example, Amazon or apple and other technology giants with credit rating of a-aa investment grade bonds have a low default risk, so they can get 2.5% interest every year when they buy the bonds. As for the non investment grade corporate bonds with credit rating of BB, they can enjoy an annual interest rate of 6%. If they invest the same amount of NT $1 million in two different grades of bonds, the annual profit margin will be 35000 yuan.

        To sum up, any investment is accompanied by risks. Investors must find a balance between income and risk in order to invest correctly and increase passive income healthily.

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