Understanding Active and Passive Investment

Making money is everyone's dream. We have high hopes for financial stability when we wake up every morning - from that tiny store, business, firm, or job – we want to expand our wealth.

Getting a job, starting a business, buying land/plot, building a house, joining a Sacco, or investing in the stock market – to name a few – are all steps toward financial independence. But how can you make the vision a reality?

Our efforts toward active and passive investment can reenergize the dream. This article will instruct you on how to engage in these investment activities as well as the procedures necessary to obtain financial independence.

Let's begin by considering each investment situation.

What is Active Investment?

Active investment involves buying and selling of products or services in relation to profitable market conditions. Here, the investor analyses and takes note of the changing conditions with an aim of beating average index returns.

It is a short-term investment activity that guarantees high returns within the shortest period. Examples of active investment include starting a business like selling clothes, taxi, hardware, hotel, and restaurant among others.

This kind of investment requires your effort to achieve your goals. For instance, if you are offering taxi services, you need to wake up every morning or hire a driver who will be running your business. If you are a freelance service provider, you should always be on your toes and be right in your decision-making to stand out and earn income.

The active investment earns active income. This is the income you get from your job, commission, profit from your businesses, etc.

Active investment is flexible; you can decide to sell your book shop and divert the money to another kind of investment. It also has expanded trading options – you increase your business depending on market conditions – and can lead to tax management.

However, this kind of investment has its cons; first, it requires a large amount of money to start and run a business like Uber, and second, it is prone to risks resulting from catastrophes, pandemics –like the global Covid-19, government policy, economic conditions among others.

What is Passive Investment?

You are relaxing at your home and you receive a text message that this year’s dividend has been deposited in your account. Or you a get a call that a plot you bought some years back has got a potential buyer at a double price. This is income from a passive investment you have.

From the example, passive investment can be defined as buying or putting your money in assets for a longer period; without expecting short-term returns.

Passive investment is a wealth-building strategy that requires less attention. You choose to join a Sacco, buy shares, and let your money grow without having to worry about how.

You can become a passive investor even when you have a little amount of capital. For example, joining a Sacco, getting a long-term investment plan from an insurance firm, or using your skills and talent to come up with a payable service or product like a book or online course.

Stock market, SACCOs, Insurance, Government bonds, Pension, Land/plot, Real Estate, Asset building such as digital products are just a few examples of passive investments.

This kind of investment attracts lower fees and decreases risk. It also accounts for transparency – you get value from what you see and guarantees high returns on average.

To succeed in this kind of investment, you need to develop patience and financial discipline to achieve your long-term goals. Passive investment is best for planning towards one retirement.

Active And Passive Investment in Kenya

In Kenya, active investment tends to weigh more compared to passive investment. According to the Central Bank of Kenya (CBK), Small and Medium Enterprises (SMEs) make up 98 per cent of all businesses in Kenya.  

The Kenya National Bureau of Statistics (KNBS) Economic Survey 2020 indicates that the real estate sector in Kenya recorded a growth rate of 5.3 percent in 2019, earning close to 7 percent of the Gross Domestic Product (GDP).

Compared to transport, which houses much of the active investment in Kenya, the sector increased by 2.8 points to make up 10.8 percent of the country’s GDP.

Statista report that as of 2019, the insurance penetration rate in Kenya decreased to 2.34 percent. This is an indication that Kenyans tend to invest more in short-term assets that guarantees returns within the shortest period.

Both investment strategies can spearhead your financing to become financially free and stable.

How can you achieve financial freedom using either active or passive investment?

Steps Towards Financial Freedom

You a job, a business, or a rental house as part of your active or passive investment. You can use these to earn financial freedom. All you need is;

• Set up a goal-oriented portfolio
• Time to learn about the investment plan
• Starting force
• Choosing the right channel or partner
  

1. Setting Up A Goal-oriented Portfolio

Before coming up with an investment strategy, you need to come up with goals that will guide you. For instance, if you are planning for retirement, you’ll need a long-term investment goal, and passive investment scores it right. To achieve short-term goals like school fees, paying rent, you’ll need an active investment plan that can generate active income within the shortest period of time.

2. Time to Learn About the Investment Plan

Your investment goal is the king. You need to study the plan and strategy that will best achieve your goal. This way, you will be able to avoid risks and frustrations related to both short and long-term investments.

3. Starting Force

Before starting any investment plan, you need that vigor to grow financially stable. Understand the magic of profits and compound interest. Know exactly what your goal aims to achieve and start immediately to invest either actively or passively.

4. Chose the Right Channel or Partner

If you're considering active investment, you'll need a partner who can help you identify your short-term objectives and work with you to achieve them. For instance, if you have a restaurant you will need hardworking employees who will meet the needs and expectations of your customers, to keep the business running and earn. The same applies to passive investment; for Sacco investment, you need a financially stable and accountable institution.

Wrapping Up

Active and passive investments are essential for our personal financial growth. Depending on your goals, the former tends to help us make quick cash while the latter is a gradual wealth-minting plan or strategy.

As the famous author Manoj Arora writes in his book, From the Rat Race to Financial Freedom, “Money has the power to buy us things. But a much bigger power of money is in generating more money for you…”. We can generate money from both investment strategies and become financially stable, only if we set up clear goals, be self-determined and hardworking. Remember, nothing comes easy.