Bill Miller, the manager of Legg Mason Value Trust, shares some advice about building wealth.
[My father said…] “See this ‘plus .25’? That means that if you own one share of this company today, you have 25¢ more than you had yesterday.” I had come in from mowing the grass for three hours to earn 25¢. So the lesson I took was that in the stock market you can make money without doing any work… Of course, I realized only many years later that you could earn the market rate of return by doing no work, but to earn an excess rate of return certainly does require some work!
Passive income is an attractive thought. Dumping money into index funds and holding onto the investment for decades can provide results that beat most of the active fund managers. This contradicts Bill’s advice—it’s quite possible to do a large amount of work in terms of researching stocks but perform worse than the indexes.
The most passive form of income has to be that returned in the form of interest on savings accounts. Saving accounts, however, won’t provide much interest. When it comes to passive income, I’ve already stated that certain activities don’t qualify, like blogging and real estate investing, because you certainly are trading some portion of your time for that income. The Amateur Asset Allocator goes farther by outlining eight levels of passive income.
The Smartest Advice I Ever Got, CNN Money, July 22, 2008
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Unfortunately even a successful investor like Bill Miller proves that outperforming an index is very difficult. If an investor wants to pick the best fund manager for the coming year, he will need to be very aware of the fine print that says, “Past performance does not guarantee future performance.” Moreover, as studies have shown a large majoriy of managers like Bill Miller do not outperform an index. So, I agree with you. All this makes it very compelling to invest via cheaper index funds.
Gentlemen prefer index funds. I have little doubt Bill Miller will rise again, though. Thanks for the link!
If you buy and hold stock index etf’s/mutual funds over long periods of time, you will be able to generate truly passive income.. My research shows that one dollar invested in S&P 500 will take 35 years to generate one dollars in dividends for you on average. So keep saving and investing for dividends ( and reinvest the dividneds)