Written by Ishan Sadhukhan
“If you are born poor it’s not your mistake but if you die poor it’s your mistake.” -Bill Gates. Put in simple words, if you want to die poor then stick to your singular source of earned income. On the other hand, if you have dreams and ambitions of becoming financially independent then you must learn to create sources of portfolio and passive income as I mentioned in my last blog. Today we will learn the ways of which you can start earning portfolio income but I advise you to learn about the three types of income (earned, portfolio and passive) on my previous blog, Three Types of Income all Millionaire’s Have.
Now that we know that portfolio income is capital gains which means profiting (or losing) from the change in the value of something. The most common method people use to make capital gains is by investing in stocks, mutual funds, and index funds.
Stocks are simply a portion of a company. You can invest in stocks by opening an investment account with a brokerage firm such as E-Trade, Fidelity, or Vanguard. Once you open an investment account you can freely trade from over 7,300 publicly traded US stocks. From there you have to pick which stocks to invest in (fundamental analysis) and when to invest in them (technical analysis). Make sure to educate yourself thoroughly before entering the market though!
“I never allow myself to hold an opinion on anything that I don’t know the other side’s argument better than they do,” as Warren Buffet’s business partner, Charlie Munger once said. For this reason, I will tell you why I personally would NOT invest in mutual funds.
A mutual fund is essentially an actively managed investment fund that is managed by “professional” money managers. Did you know 96% of mutual funds aren’t even able to beat the market? By the market, I mean Exchange-Traded Funds (ETF’s). Exchange-Traded Funds are investment funds that are traded on the stock market. They can include a diverse combination of stocks, bonds, and commodities.
So why do people still invest in mutual funds? Because in the eyes of an uneducated investor, it seems like a perfectly diversified investment that is managed by experienced professionals. But the benefits of a mutual fund comes with a cost in the form of hidden fees. Logically, it isn’t worth it to give free money to the mutual fund managers when you can make the same amount of money from investing in an ETF.
Think of an index fund as a mutual fund with significantly fewer fees. It still provides the benefits of broad market exposure and is ideal for retirement accounts. Commonly invested index funds and ETF’s are Vanguard Total Stock Market Index (VTSMX), Fidelity Total Stock Market Index (FSTMX), Vanguard S&P 500 ETF (VOO), SPDR S&P 500 ETF Trust (SPY).
To summarize, stocks, mutual funds, and index funds/ETF’s are the most common forms of portfolio income. Before investing in any one of these I advise you do research about each of these yourself. I just wanted to end this by saying thank you to Samuel Keoleian for the recommendation to further expand from my last blog.
One last thing: remember that this blog only serves the purpose of educating you on portfolio income based on my own knowledge. I recommend everyone to educate themselves further and make investment decisions on their own…even if that means investing in a mutual fund.
Disclaimer: All individuals are advised to conduct their own independent research before making a purchase decision. Ishan Sadhukhan and/or PIK Industries LLC does not accept any liability for use of information from this site.