5 Ways to Boost Passive Income

In this blog post, we're diving into the realm of passive income and exploring efficient ways to boost your earnings before summer comes to a close. 

I see these five strategies as quick wins that anyone can implement within just five days. 

Often, these simple steps are overlooked or not fully understood, yet they hold the potential to significantly enhance your portfolio's returns. 

The inspiration for this post came from a recent experience where I sat down with my cousin and optimized their stock portfolio, resulting in a 50% increase in ROI within a mere 10 minutes. 

While I'll delve into the specifics, it's important to note that this is educational, not concrete financial advice. 

Each person's investment journey is unique, and adjustments should align with individual goals and resources. 

I’m a sucker for optimizing passive income through real estate investing, but even if you're not involved in real estate, these insights remain invaluable for crafting a robust portfolio. 

So let's dive in – I'm thrilled to share these quick-win strategies to maximize your passive income.

#1: Asset Allocation

First on the docket is a big one.Imagine this: a staggering 90% of your investment returns can be attributed to asset allocation. 

It's easy to get caught up in debates about specific stocks, like the never-ending Nvidia vs. Intel rivalry or the choice between Tesla and FAANG stocks (Facebook, Amazon, Apple, Netflix, Google). 

But here's the real revelation: these discussions often occur within the same asset class – equities. 

The true game-changer is your portfolio's overall asset allocation. 

Remember the IPS, investment policy statement? 

It's your roadmap, detailing your savings goals, asset allocation strategy, and the triggers for rebalancing. 

Traditionally, portfolios consist of stocks, bonds, and real estate for diversification. 

Initially, real estate provides this diversity, but what's truly exciting is how its superior returns become evident over time. You need a well-balanced distribution of investments across these categories.

Now, let's talk about stock-bond portfolios, which are central to many retirement strategies. 

A quick rule of thumb: use the formula 120 minus your age to determine your allocation percentages. For instance, if you're 40 years old, allocate 80% to stocks and 20% to bonds. 

This approach ensures your portfolio's resilience against market fluctuations, allowing you to withdraw even when the stock market takes a hit. 

But here's an important twist: if you own real estate, it's akin to having a bond equivalent due to the steady rental income it generates. 

This can alter your investment strategy, allowing you to be a tad more aggressive in stocks. 

Your portfolio will differ from someone without real estate, and you don't have to strictly adhere to the "120 minus your age" rule.

Hold on, what about fixed income assets like bonds and CDs? 

Well, they play a significant role, too. However, be cautious when investing in these outside of retirement accounts. 

Why? It’s because of taxes. 

Any returns you make on bonds and CDs outside of tax-deferred accounts will be subject to marginal taxes. 

It's like having a tax drag on your investments. This is why it's paramount to be mindful of your asset allocation.

To put this all into action, regularly assess your asset allocation. Rebalance your portfolio at least annually, or even quarterly, to ensure your allocation stays aligned with your goals. 

Remember, your asset allocation should be intentional and strategic. 

And don't forget, if real estate intrigues you, explore our syndication offer or our upcoming event. Both provide avenues to enrich your understanding and actions in the realm of real estate investment.

So, to sum it up, asset allocation is the foundation of your investment strategy. It's the compass guiding your financial journey.

#2: Fees

Let's delve into the pivotal role that fees play in shaping your investment outcomes. 

While asset allocation is certainly crucial, the impact of fees on your investment returns can be equally significant. 

It's alarming to note that a substantial 92% of investors are oblivious to the fees linked to their investments, particularly within the dynamic realm of the stock market. 

Even well-intentioned physicians often resort to mutual funds or target date funds, entrusting experts to handle their investment portfolios. 

However, it's worth mentioning that these seemingly expert-managed avenues also come with their fair share of fees.

Unpacking the complexity further, actively managed funds introduce an additional layer of financial burden in the form of transaction costs and taxes, both upon entry and exit. 

This intricately crafted fee structure collectively exerts a considerable drag on the overall returns generated by your investment portfolio. 

The wisdom shared by renowned figures in the financial world underscores the importance of fee management. 

Warren Buffet's advice resonates strongly: allocating 10% to short-term government bonds and 90% to a cost-effective S&P 500 index fund, ideally from Vanguard, provides a robust strategy. 

Buffet's endorsement stems from the fact that index funds have consistently demonstrated their superiority over mutual funds and pension funds in the long run.

Jack Bogle, the visionary behind Vanguard, emphasizes the detrimental effect of excessive fees, offering a tangible example. 

A seemingly modest 2% fee can erode returns by an astounding 67%. This impact is not to be taken lightly. Consider a scenario where a portfolio with an annual return of 7% over five decades could be worth $10 in the end vs $30 if there hadn’t been any fees. 

This stark illustration underscores the powerful influence fees wield over your investment journey.

While some argue that fees might be justified for superior returns, empirical evidence suggests otherwise. Studies consistently demonstrate that a mere fraction, less than 4%, of managed funds manage to outperform the S&P 500 index. 

Real estate syndication, often seen as a complex avenue, introduces its own fee structure. Here, the key is to evaluate projected returns while accounting for associated fees. 

This nuanced approach allows for a more comprehensive assessment of opportunities and inherent risks. This approach emphasizes the importance of aligning fees with actual performance, ultimately steering clear of overpayment for subpar outcomes.

In the pursuit of an effective investment strategy, simplicity is often the guiding principle. 

One approach gaining traction is the two- or three-fund model, which offers a well-balanced portfolio. 

Investing in an S&P 500 index fund, combined with a total US bond market fund, presents a straightforward yet comprehensive investment approach. 

Additionally, considering exchange-traded funds (ETFs) can offer flexibility, lower minimum requirements, and ease of trading, adding to the appeal of a fee-conscious strategy.

To sum up, managing fees emerges as a pivotal factor in achieving optimal investment outcomes. 

Transitioning from managed funds to low-cost index funds empowers investors to curtail excessive fees and maximize the returns on their portfolios. 

This holistic understanding of the fee landscape ensures that investors can make informed decisions aligned with their long-term financial goals.

#3: Dead Money and Lazy Equity

Point number three highlights the concept of inefficient capital and unused equity. 

Often, we overlook the fact that while we should ideally have three to six months' worth of emergency funds readily available, the rest of our money should be invested. 

It's common to find surplus cash in bank accounts or investment platforms that could be better utilized. 

These underinvested funds, labeled as "dead money," have the potential to lower portfolio returns.

To address this, take a moment to review your brokerage, retirement, and savings accounts. Any funds exceeding your emergency fund requirements should be allocated for investment, boosting your returns. 

Similarly, for real estate investors, there's a concept of "lazy equity" in your properties. 

When your property values rise, your equity increases, even without additional investment. 

To maximize this, consider leveraging your excess equity through methods like a HELOC (Home Equity Line of Credit) to tap into these funds.While timing matters for strategies like cash-out refinancing, a HELOC offers a revolving line of credit, akin to a credit card. 

“But Param, given current interest rates is it still wise to get a HELOC?”

The answer lies in comparing the anticipated overall returns of your real estate investment, accounting for tax benefits, cash flow, debt reduction, and market appreciation, with the cost of the HELOC interest. 

If the difference (arbitrage) is favorable, pursuing a HELOC makes sense, especially if you're actively increasing property value.

For more in-depth insights into these strategies and wealth-building through real estate, consider joining our upcoming event. At the event, we'll delve deeper into these concepts, discussing effective strategies, tax optimization, and ways to enhance your real estate returns. 

The event will feature real-life stories from five successful students who have followed these principles, offering inspiration and practical guidance. 

But for now, remember to assess your accounts for idle funds, as revamping your investment approach could significantly improve your portfolio's performance.

#4: Tax Efficiencies

You all know that it’s crucial to consider various tax implications when making financial decisions. 

For instance, if you're invested in REITs or debt funds that generate distributions and interest income, remember that you'll be subject to taxation if these earnings fall outside retirement or tax-deferred accounts. 

Ideally, you'd want such investments within tax-deferred accounts. A noteworthy tax-efficient strategy is the utilization of backdoor Roth IRAs.

What's a backdoor Roth IRA? 

It involves a specific approach due to income limitations. In 2023, if you're married and earn over $228,000, or if you're single and earn over $153,000, you're ineligible to directly invest in a Roth IRA. 

Instead, you can put money into a traditional IRA and swiftly transfer it into a Roth IRA within 24 hours. 

The advantage? 

Particularly for hybrid investors who've maximized their retirement accounts and have post-tax funds available, this approach can be advantageous.

By employing the backdoor Roth IRA, you can contribute up to $6,500 annually per individual (or $13,000 per couple) and convert it into a Roth IRA. 

Subsequently, withdrawals, even substantial ones, won't be subject to taxes. Moreover, after five years, you can withdraw your initial contribution penalty-free.

It's prudent to mention the pro rata rule which can affect those with traditional IRAs seeking to use the backdoor Roth strategy. Make sure to research this rule or consult your CPA for clarity. 

If you're focused on real estate investing, it might be wise to channel post-tax funds into real estate investments outside retirement accounts, given the tax efficiency benefits could be compromised otherwise. Again, in this case I recommend consulting with your CPA.

While there's a strategy called the mega backdoor Roth, it might not be suitable for those invested in real estate. 

Instead, allocating post-tax dollars to real estate outside retirement accounts is often more advantageous. 

For those with retirement account funds, especially those considering real estate syndication, establishing a self-directed IRA with the help of facilitators is a feasible option.

In any case, prioritizing the maximization of your backdoor Roth IRA can yield substantial benefits over time, namely non-taxable income at the time of withdrawal in retirement.

#5: Tax Loss Harvesting

Alright, let's cover the final topic, number five: tax loss harvesting. 

This strategy involves selling securities at a loss to counterbalance your capital gains tax obligations. 

If you hold stocks that have declined in value, you can sell them to create losses. 

Even if you don't have capital gains, you can offset up to $3,000 of your ordinary income from taxes using these losses. 

Each year, this $3,000 limit applies if you're selling stocks at a loss. If your losses exceed this amount, let's say you have $5,000 in losses, you can use $3,000 this year, and the remaining $2,000 can be carried forward to offset future income.

This sounds great, right? But it gets better because this approach offers an advantage beyond just generating cash. 

Instead of keeping the funds in a savings account, you can reinvest the proceeds in more stable assets with better potential returns. 

This way, you're simultaneously selling and buying assets while benefiting from the tax shelter provided by the loss. 

Remember, to maximize this strategy, avoid purchasing the same asset immediately, as that triggers a wash sale, nullifying the tax benefits. 

Instead, opt for a similar asset to maintain your desired asset allocation in terms of risk and return.

Bonus: DRIP and DCA

I’m going to leave you with some bonus advice, and here it is: utilize DRIP and DCA. Let's break these down.

DRIP stands for dividend reinvestment plan. Whether you're invested in stocks or index funds, it's crucial to choose the DRIP option. This allows your dividends to be automatically reinvested, compounding your investments over time. 

Compound interest is a powerful force, often referred to as the eighth wonder of the world. For example, over 40 years, a portfolio without dividend reinvestment would reach $400,000, while reinvesting dividends would lead to $600,000..

Moving on, there's DCA – dollar cost averaging. 

This strategy avoids the pitfalls of trying to time the market, which most of us find challenging. 

DCA helps you invest consistently over time, ironing out market fluctuations. It's a form of diversification spread across time, allowing you to invest without letting emotions dictate. 

This approach ensures you're invested through every market cycle, contributing to your long-term success.

So, to round this all out, I hope you find these 5 ways (actually 6 ways) of boosting your passive income to be interesting and useful. And remember, they are really easy to implement, so don’t be afraid to just get started. I guarantee that you’ll see a higher return in both the short and the long run. 

Happy investing!

Are you ready to go from overworked physician to financially free 10X faster? Join Generational WealthMD’s FREE 10X Your Financial Freedom Event, September 7th, 12th, and 14th, to get the proven framework to generate 6 figures in cash flow and the freedom cxyou’ve been looking for: https://www.generationalwealthmd.com/event

Invest in GW Capital’s newest offering, Park 33: a class A 188-unit property asset located in South Bend, Indiana, and #1 property in the nation for year-over-year rent growth. Learn more here: https://www.generationalwealthmd.com/indiana 

Interested in learning more about taking back control of your time and income by building your real estate portfolio the right way? Get on the waitlist for the next cohort of Creating Generational Freedom here: https://www.generationalwealthmd.com/real-estate-investing-101

Want to stay connected to a supportive community of like minded professionals also trying to creating meaningful passive income? Join us on Facebook at https://www.facebook.com/groups/generationalwealthmd