In most cases, people start to question how to create passive income on limited income? They consider their jobs as their primary source of income. You have to start using a part of your actively earned income into generating passive income on a regular basis. You will be surprised at how fast your residual income will grow if you start out early.
Your investments will multiply if you apply the power of compounding properly. A dollar a day if invested correctly will make you a millionaire before you retire.
If you are new to the stocks and mutual funds, then I advise you to go for investing in indexed funds using Dollar Cost Averaging. This strategy gives highest returns with minimum amount of risk. Let me explain:
Indexed funds are a type of mutual funds with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund provides broad market exposure and low operating expenses as no fund manager is involved.
The lack of active management generally gives the advantage of lower fees and lower taxes in taxable accounts. This increases your returns as an investor. It has been found that indexed funds outperform funds managed by fund managers as there is no human intervention and mistakes.
Dollar Cost Averaging
This technique involves buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. Eventually, the average cost per share of the security will become smaller and smaller.
Dollar-cost averaging lessens the risk of investing a large amount in a single investment at the wrong time. No financial expert has been able to predict the behavior of stock market accurately.
Dollar cost averaging will reduce your risk considerably. In dollar cost averaging, you will need to decide on three parameters: the fixed amount of money invested each time, the investment frequency, and the time horizon over which all of the investments are made. The longer the time horizons, the better are the results—the minimum recommended period is 12 months.
The best way to start building residual income is to combine investing in indexed mutual funds using dollar cost averaging strategy. This way you will get the highest returns with minimum risk. Many fund managers will advise you against this strategy because they do not benefit from it.
Take the human element out of investing – let the market magic work. It has shown time and again that index funds beat the performance of most fund managers. The exception to the rule is Warren Buffet! If you can find a fund manager backed with 20 years track record of beating the market then go for it … I am yet to find one.