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Investors have coveted passive income streams since the early days of the COVID lockdown, when we were all sitting around on our laptops, figuring we might as well make a few extra bucks. Its popularity shows no sign of waning — not with inflation surging and eggs at $5 a dozen.
The pursuit of passive income ignites young and old investors alike. In a recent survey of 1,000 US investors with at least $10K in assets, the State of Alternative Assets report, respondents across age demographics ranked it as a top 2023 priority. But while passive income is a common goal, there’s an increasingly clear divide in how generations understand and earn passive income. Gen Z and Millennials see it as a dependable stream of income outside their main paycheck and seek it via crypto and side hustles. Gen X and Boomers take the set-it-and-forget-it approach, and look for passive income via capital appreciation.
In the constant struggle to get ahead, young investors may have lost sight of what passive income truly is — and may be looking for it in the wrong places.
The allure and illusion of passive income
The IRS defines true passive income as trade or business activity that doesn’t involve material participation. The “passive income ideas with no money” social media content aimed at Gen Z and Millennials doesn’t fit this definition. Passive income TikTok influencers recommend starting a drop-shipping store, driving for gig apps, or creating a blog to earn affiliate marketing. These ventures can generate significant additional income streams, but they’re more accurately described as side hustles because of the daily effort involved.
This brand of content exists for Boomers, too — although the recommended side hustles fall more towards the flavor of “teach the neighbor kid piano” and “rent out your spare room.” Many Boomers can’t maintain their lifestyles on social security alone, especially as the program’s benefits lose their buying power with the rising cost of living. Stacking passive income streams offers a way to supplement these payments.
The next iteration of the not-quite-passive income popular with young investors is leveraged income, which refers to assets that require serious work upfront but later generate income without much involvement.
Then there’s capital appreciation, which isn’t exactly the same as earning true passive income because it doesn’t usually generate cash flow. Still, both young and old investors embrace capital appreciation as a form of passive income, and pursue it in wildly different vehicles.
Passive Income through Capital Appreciation
Millennials and Gen Z, as discovered in the State of Alternative Assets survey, view cryptocurrency as a valid method for earning passive income. 80% of Millennials and 81% of Gen Z in the survey were interested in investing in Bitcoin in 2023. “Opportunity to earn passive income” was one of the top three reasons given to explain their interest. The same pattern and interest levels hold for other cryptocurrencies.
Obviously, crypto investing is anything but a passive endeavor. Unlike stocks, the markets are open 24/7. Trading crypto induces the same thrills as gambling: gripping investors with the all-consuming drive to stay glued to their phones, lest they miss a 10x rise or a 50% drop.
Older generations give crypto a wide berth, perhaps recognizing its time-and-energy drain. 15% of Boomers in the State of Alternative Assets survey invest in Bitcoin for passive income purposes, compared to 39% of Gen Z. That’s similar to other cryptocurrencies (10% of Boomers, 34% of Gen Z) as well as NFTs (8% of Boomers, 32% of Gen Z).
Boomers in the survey cited classic stocks (30%) and bonds (34%) as their favorite assets for earning passive income. Perhaps they’re onto something younger investors have yet to understand.
Earning true passive income is not glamourous
The truest form of passive income resembles dependable earning streams that don’t require you to stoke the flames of your investment. This typically comes through “boring” investments with modest returns, like fixed-income securities, dividend stocks, or alternative business assets like real estate, farmland, or franchises. What investor demographic do we associate with investments like these? You guessed it: Boomers.
Some alternative business assets can indeed co-opt your free time. Think of the “quick” fixer-upper real estate investment gone haywire, or the starry-eyed first-time franchise operator biting off more than they can chew. Alternative business assets can become a more passive commitment when investing in a managed portfolio of these funds (in other words, buying into a fractionalized asset instead of owning it outright). The fractionalized investment model offers a similar level of involvement as a private equity fund.
Boomers, who hold the biggest share of US real estate, are way ahead of Millennials and Gen Z in seizing alternative business assets as a way of earning passive income. The State of Alternative Assets report found that 41% and 47% of Boomers and Gen X seek alternative business assets for passive income purposes, compared to 32% and 24% of Millennials and Gen Z (respectively).
Take the Boomer approach to passive income
Young investors: If extra income without extra effort is the goal, stability is key. Crypto’s volatility can easily offset its meteoric appreciation. Those hoping to achieve steady and reliable income streams with a crypto-heavy portfolio may need to reevaluate their passive income strategy. Over time, they might consider shifting their crypto allocation to assets that demand less material participation, like dividend stocks or alternative business assets.
These kinds of assets might deliver more moderate returns compared to what you can earn in a good crypto year. But they enable investors to align their activity levels with the true goal of passive income: cultivate low-effort earning streams to supplement your paycheck. By gradually allocating more of their portfolios to low volatility, income-generating assets, young investors can set their ultimate dream in action: a high quality of life free from dependence on traditional work.