Turning Active Income into Passive Income

Stamp Collecting & Computer Games

When I was young, my cousin and I used to collect stamps. We would soak the used envelopes (which have stamps on them) in the water to separate the stamps from the envelopes. Then we would leave the stamps out to dry and put them neatly in an album. Sometimes we would buy used or new stamps to add to our collections.

Being young, we do not have much cash nor much mail. So our stamp collections are limited. We don’t actually spend a lot of time collecting or buying stamps. However, every so often I would take out the albums and enjoy flipping through the pages to look at my stamp collections. Occasionally I would rearrange the stamps in the album and think about how I got these stamps.

As I grew older, my dad bought me a computer. And well, I did use it for games..hehehe :p
Of the games I played – I tend to like ‘strategy’ games like Starcraft, Koei Romance of 3 Kingdom, or even simple city planning games like Sim City. Somehow, I am not really into action/shooting games like Doom or Quake. Yeah, I sound really old hahaha.

Investing and Temperament

However, the point I am driving at – I think there is a little bit of similarity between Passive Investing and hobbies like Stamp collecting and ‘Strategy’ games. I particularly like the way Kyith put it: “Gamify your financial life” (read here).

Besides knowledge and determination, I think temperament is equally (if not more) important. To build up a portfolio, it takes time and planning. Whether you are investing for Capital gains or Passive income, profits do not appear overnight. As what people would normally say “Time in the market is more important than timing the market”.

Well, these past few months I have not been investing much in the stock market. In recent months, I also did not add significantly to my P2P loans / Invoice financing portfolio as well.

One reason maybe because I am busy at work. The other reason could be due to the anchoring bias. I have been tracking some stocks and their prices have not dropped (in relation to their prices many months back), or the prices of the stocks in my portfolio have not dropped below the prices which I have bought them. Interestingly, 2 stocks in my portfolio might be privatized and de-listed (Nirvana Asia and SMRT) while one ETF (Lyxor Japan (Topix)(DR) UCITS ETF will be de-listed on 22 August 2016 as the fund has not attracted sufficient investor demand.

With regards to my P2P loans and Invoice financing portfolio, I don’t intend to have a large proportion of my investment fund in them. Of the loans I have funded, 1 loan has been in arrears for 3 months. A bank has begun bankruptcy proceedings against the borrower. The platform’s appointed debt collector has also been engaged by other financial institutions to begin debt collection proceedings against the borrower. A confirmed default (whereby I don’t get back the remaining sum I have invested) would wipe out most of the interests/gains I have accumulated so far for my P2P loans and Invoice financing portfolio. In a way, the risks involved for these loans appear to be much more than a conservative well-funded stock with a 3% to 4% dividend yield (at least it is highly unlikely I will lose all of my investment in any particular stock).

A peek into my portfolio performance
Nevertheless, when I do not study or read about stocks/companies or when I don’t feel like buying shares, I tend to look at my portfolio and ‘strategize’. Kind of similar to how I would flip open my stamp albums in the past. Well, ok… in the case of my investment portfolio, there aren’t really anything tangible. Nowadays almost everything is ‘digitized’. They are just basically numbers. However, I would sometime dissect these figures and try to see how my portfolio has performed.

Well, as you are aware I am trying to increase my passive income. However, I am not overly aggressive in seeking out high passive incomes …eg. just invest in high dividend yield stocks. Nevertheless, having a decent yield is one of my criteria is seeking out assets for my portfolio.

Anyway, I have done a few charts to study the performance of my portfolio for the year 2016 (eg. from the beginning of Jan 2016 to beginning of Aug 2016). I did not include the actual cash value as I like to keep it private, and I felt that it doesn’t help in illustrating my points.

Ok, the below chart (Chart 1) show the accumulated value of Total Net Worth (excluding the value of the property I am staying in).

The below chart (Chart 1A) is a subset of Chart 1. My stock portfolio value constitutes a portion to my net worth. However, the value of this portfolio tends to fluctuate up and down monthly. It also reminds me that my accumulated net worth is never fixed. In the event of a market crash, a significant portion will just ‘evaporate into thin air’ quickly. So mentally I am not so fixated by the net worth value.

On normal or good months, I like to look at these values, but during bad months/market crashes, I tend to ignore them and focus on what stocks are undervalued.

The below chart (Chart 1B) is also a subset of Chart 1. My P2P Loans & Invoice Financing portfolio value constitutes a portion to my net worth (albeit a smaller portion). The portfolio value doesn’t really fluctuate much, as basically I am just investing in loans / Invoice financing and collecting interest monthly.


Conversion rate (from active income to passive income)
This brings me to the question: What is the conversion rate monthly from my active income (salary from my full-time job) to passive income (stock dividends & P2P loans / Invoice financing interests), for the year 2016 so far.
I know the cumulative values of my net worth and portfolios, but as my goal is to slowly build up my passive income, this question is important.

So first I start by charting out the cumulative values of my active income for the year 2016 so far (See below Chart). There are some errors in my figures for my own record as I only track my salary after CPF deductions. So the values are not the actual salary I am getting per month.

Next, I chart out the cumulative values of my passive income for the year 2016 (see below chart). As you can see, there is a spike in the month of May due to the inflow of stock dividends.

Next, come the interesting part. Each month I would divide the cumulative value of my active income & passive income by 12 (total no. of months per year). This would be the ‘average monthly’ Active / Passive income value during that particular month. However, I will only get the final confirmed average monthly active/passive income for 2016 at the end of the year 2016 or beginning of the year 2017.

For instance, if the cumulative value of active income for Jan is X1 and the cumulative value of active income for Feb is X1 + X2, then the average monthly values I will get for Jan is X1/12 and (X1+X2)/12 for Feb. So month after month, the value will either be the same or more.

See below chart. It compares the value of the ‘average monthly” value of my active income with that of my passive income.

With these values, I am able to get the percentage of the average monthly passive income when compared to my average monthly active income. The goal is to each month, I try to increase the percentage of my passive income. This is not always easy as I do not receive stock dividends every month (payouts are lumpy). On the other hand, my monthly salary is fairly constant except I normally get my bonus in Jan and pay rise in May.
I view the below chart as the most important charts of all (among the charts shown above).

As you can see, ‘my highest score’ is approximately 14% for the month of June. eg. Assuming this becomes my ‘final score’ for the year and if my total monthly income is $1000 (passive + active income), $123 will be passive income while $877 will be active income. If my total monthly income is $3000, then $369 will be passive income while $2631 will be active income. Or a more simplified way would be if my active monthly income is $3000, then my monthly passive income would be $420.

At this point of time, I do not know what is my ‘final score’. What would be this percentage value at the end of the year? Hopefully, I can increase my passive income and increase this percentage value by the end of the year.

Alternatively, I can cheat and reduce my average monthly active income (eg. quit my job, take a lesser paying job)… hahaha. Just joking.