All paths of FI rely on passive income, meaning your money must be working, even if you are not. There are three asset classes that earn passive income: securities (such as stocks and bonds), business ownership, and investment real estate. I have sub-pages for each of these passive income sources that share my favorite resources specific to each asset class. For an overall view of passive income, below I have shared my favorite resources for identifying which passive income sources may be the best fit for you.
It shows the relationship between net worth and asset allocation. If you want to aim for a specific level of net worth, this chart provides a basic road map on how the average person with that level of wealth has gotten there.
The authors make the case that there are infinite ways to make money investing, but relatively few ways to lose money. They show that investment losses occur when “investors” emotionalize their gains or losses by anchoring their self esteem to the investment outcome. The solution? Develop an investment plan before you start investing, and then stick to the plan. By defining when you will buy and when you will sell investments up front, you not only avoid self-delusion, but you also shield yourself from crowd-delusion and the resulting manias. Some of the details earlier in the book may not relate to mainstream investors, but the book is any easy read and makes a great case for starting with an investment plan.
3. The Black Swan and Antifragile
Nassim Nicholas Taleb makes a convincing case that history, including economic history, moves in large jumps rather than steady crawls. Further, these jumps can’t be predicted in the future using normal statistics–all Swans are white until you find a Black one–no matter how hard economists and others try to model them. This means that the very common risk vs. reward plots, and the resulting portfolio theory, are fundamentally flawed (risk is measured using standard deviation, but standard deviation does not describe the most important economic events!). Luckily this book does a great job explaining why people fall victim to these shortfalls, and how you can identify and avoid (or acknowledge) it in your own investments. The book also provides some insight on investment strategies that are robust against Black Swans. One example: placing most of one’s portfolio is in extremely safe investments and spreading the remaining amount across highly speculative and leveraged investments. This “barbell” strategy yields medium risk overall, but provides exposure to positive Black Swans. If you also read The Leverage Equation (below), you will understand that positive Black Swans have a high positive expectancy: they have an unknown but under-predicted probability multiplied by a large payoff. The Black Swan is a must read (and re-read, since it is loaded with information).
If you found value in The Black Swan, the next book in the series, Antifragile, is also worth checking out. It builds on the concepts introduced in The Black Swan, with a focus on things (from all aspects of life) that are not only robust against uncertainty, but actually gain from uncertainty.
Todd has a lot of personal and coaching experience that places him in a unique situation to help people identify and leverage their strengths in pursuit of financial independence. He has a lot of free content that I am admittedly still working through, and also offers courses and coaching. Since I am still working through the free content, I haven’t explored his paid products. Nonetheless, I am comfortable recommending his site as a good place to start understanding passive income. I also highly recommend his book The Leverage Equation:
This book considers investment returns using expectancy: Expected Value = (Probability of Gain)*(Magnitude of Gain) – (Probability of Loss)*(Magnitude of Loss). Five of the six forms of leverage discussed–time, technology, communication, network, and knowledge leverage–increase the probability and magnitude of gain without increasing the magnitude of loss (i.e. without increasing risk). The last form of leverage–financial leverage–increases gains and losses, and thus requires more care. This book is a nice complement to The Black Swan (above).