Passive investing in Australia
Passive investing is a hands-off approach to investing in assets that require little active involvement.
What is passive investing?
Passive investing is an approach to investing that focuses on assets that require little ongoing attention or maintenance. For example, instead of actively following the stock market and picking which shares to buy, a passive investor would purchase an exchange-traded fund (ETF) or even a dividend stock.
While passive investing can be suitable for any type of investor, it may best suit those with little investing experience, or who don't have the time to pursue an active investing strategy.
Finder survey: Are Australians making a profit from their stock/ETF investments>
| Response | |
|---|---|
| I'm not invested | 40.87% |
| My portfolio is showing a profit | 35.02% |
| I don't know | 13.8% |
| My portfolio is showing a loss | 10.31% |
Source: Finder survey by Pure Profile of 1145 Australians, December 2023
Dividend stocks
When you buy shares in a company, you own a portion of that company and are entitled to a share of its profits. When the company’s share price increases, the value of your “parcel” of shares also rises in value.
But there’s also another easy way to make money from shares: dividends. Some companies pay “dividends”, which are a portion of the company’s profits, to each shareholder at specific times throughout the year. Not all companies pay dividends, but investing in those that do is a great way to generate a passive income. It's also possible to receive franking credits along with your dividends, so long as you're beneath a certain income bracket. You can read more about how franking credits work in our guide.
And you don’t only have to invest in shares in Australian companies either. If you open an account with one of the many online share trading platforms on offer, you can trade shares not only on the Australian Securities Exchange (ASX) but on major stock exchanges all around the world. So while you’re catching up on your beauty sleep, your investments could be earning you big bucks.
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Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
What are the pros and cons of investing in dividend shares?
Pros
- Capital gain. Investing in shares allows you to take advantage of capital gains from the growth in a company’s share price.
- Income. If you buy shares in companies that regularly pay dividends, shares can provide an ongoing source of income.
- Global markets. Because you can buy and sell shares on stock exchanges all around the world, you can ensure that your money is working as hard as possible even while you sleep.
- Convenient. It’s quick and easy to buy and sell shares online whenever it is convenient for you to do so.
Cons
- There are risks involved. While share prices can increase, they also have the potential to decrease and there is a real risk that you could lose the money you invest.
- Prices fluctuate. Share prices fluctuate all the time – check out a graph charting the performance of the ASX for a visual representation of this – so you could wake up in the morning to find out that you’ve actually lost money.
- Dividends may come and go. Because Companies pay dividends when they earn profit, you may find dividends dry up along with your initial capital if a company starts to underperform.
Exchange-traded funds
Exchange-traded funds or ETFs are a simple way to get exposure to multiple companies on the stock market without having to invest in them directly. ETFs are a form of index fund that track the performance of a particular commodity, industry or group of companies, and can be a low-cost way to help diversify your portfolio.
A popular example of an ETF in Australia is the iShares Core S&P/ASX 200 ETF, which tracks the 200 largest companies on the Australian stock market. Like regular stocks, ETFs can be bought and sold on most share trading platforms.
What are the pros and cons of investing in ETFs?
Pros
- Capital gain. ETFs track the performance of certain stocks or other securities, meaning you can make a capital gain if they increase in price.
- Dividends. Some ETFs pay out dividends, which can be another source of passive income.
- Diversification. ETFs are one of the easiest ways to diversify your portfolio.
- Convenient. Buying ETFs can be very simple and cost-effective.
Cons
- Your capital is still at risk. Like regular shares, ETFs can go up and down in price, and different ETFs may have different risk profiles that you'll need to be aware of.
- Potential returns. While individual ETFs can often beat the market, they may not offer the same returns as investing in high-performing individual stocks.
Peer-to-peer lending
Have you ever looked at the interest rates banks charge on their personal loans and wished that you could earn the same rate on your savings? Well, it’s now possible for anyone to become a lender, thanks to the rise of peer-to-peer lending services.
The concept behind peer-to-peer lending is actually quite simple: if you have money to invest, a lending service will match you with a customer looking for a loan. The matching process takes place through an online platform such as a website, and it allows you to cut out traditional lending institutions such as banks.
You get to put your money towards a managed investment product, and the borrower pays the loan back over time with interest. Peer-to-peer investing is available for personal and business purposes, with companies such as RateSetter, Wisr and OurMoneyMarket offering this service.
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Investments made through a P2P lending platform are not protected and are subject to risks including credit risk (defaults) and liquidity risk. These investments are not subject to review by the Australian Financial Complaints Authority. Actual returns may vary from the Expected Returns declared by the Providers. Read the PDS for details before investing and consider your own circumstances, or get advice, before investing.
What are the pros and cons of peer-to-peer lending?
Pros
- High interest rates. The interest rates on peer-to-peer loans are typically substantially higher than the interest rates offered on savings accounts and term deposits.
- Diversification. Peer-to-peer lending offers a unique opportunity if you’re looking to diversify your investments, plus you can also minimise risk by spreading your funds across a number of loans.
Cons
- New service. Peer-to-peer lending is still a relatively new offering in the Australian financial marketplace, so make sure to check the credibility of the lending platform before handing over any money.
- Risk vs reward. While peer-to-peer lending does provide the potential for high returns, there’s also the risk that the borrower may not repay the loan. Unlike savings accounts and term deposits, the money you invest in peer-to-peer lending is not covered by the Australian Government Guarantee.
- Defaults and fees. You’ll need to check with the peer-to-peer lending service to find out what happens if the borrower defaults on the loan. It’s also important to find out information on how the interest rate is set, whether you need to pay fees to the lending platform and what happens if the platform operator goes broke.
Rent out a property
If you’re lucky enough to own more than one property, renting out the spare property is an excellent way to generate an ongoing source of income. If you live in a capital city like Sydney or Melbourne, you could earn a substantial amount of rental income by renting out a house, apartment or granny flat. While there’s undoubtedly some work involved in acquiring an investment property, an experienced property manager can look after your investment while you sit back and wait for the money to flow in.
However, you don’t even have to own an investment property to make money from rent. Thanks to accommodation sharing services like Airbnb, you could rent out your own home while you’re away on holidays. You could even rent out a parking space or office space that you’re not using, which can provide a steady source of extra income with very minimal effort involved. If everything goes as planned, all you’ll have to do is place an ad.
Pros and cons of renting out a property
Pros
- Earn money from something you don’t use. Got a spare granny flat or parking space you don’t use? Rent it out and start making money.
- Capital gains. If you own an investment property, not only can you benefit from ongoing rental income but you will also be able to take advantage of long-term capital gains.
- Long-term security. The ongoing returns provided by renting out a property can provide money for your rainy-day fund or act as an extra source of income.
Cons
- Property damage. If you’re unlucky enough to end up with bad tenants and they damage your property, you could be left with an expensive repair bill.
- Property management costs. Whether you manage the property yourself or employ a real estate agent as a property manager, you will need to factor these costs into your budget.
Take a look at our investment home loans guide.
These are just a few of the ways you can make money while you’re sleeping, and there are plenty more you can think of if you put your mind to it, so consider putting one or more of them to work for you. When you make money while you sleep, it’s hard not to wake up happy.
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