Comment by miki123211 | Hacker News Reader

Comment by miki123211 | Hacker News Reader

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> the version of passive income where you don't do anything productive at all, ever, and just put up some initial capital in exchange for even more money back, is always a scam

No, that's just investing.

This is how savings accounts work, this is how CDs work, this is how treasury bonds work, this is how passive investing (e.g. via ETFs on index funds) works, and there are many, many more examples.

If you're keeping your retirement savings in an IRA / other local equivalent, whether owned privately or by your government, the same processes happen behind the scenes.

You put in capital, you lock that capital away for a while, you get back more capital later.

The differences here are in terms of possible returns. Bonds have (relatively) low returns but almost 0 risk, index funds have significantly higher returns but are also higher risk, though it's still pretty low if your time horizon is multiple decades, and there are crazy investments (think Bitcoin) with possibly eye-watering returns, but also an enormous amount of risk.

Now investments with "guaranteed" eye-watering returns (think >10% per year) and apparently 0 risk? Yeah, definitely a scam.

> No, that's just investing.

Yes. Investing is passive income. If you have $20M and your lifestyle requires no more than $800K/yr of income taxed a waaaaay lower rates than the working stiffs pay on the same, then a 4% return more than suffices to live off of income that is waaaaay more passive than most passive income frauds even come close to promising.

The difference between "investing" and "passive income" is mostly just the difference between blue blood and the new rich. A tale as old as time.

Working men of the world uniting would be an utter disaster, so instead they're persuaded at any cost to choose sides in this absurd dichotomy between two sets of do-nothings.

Why would working men of the world uniting be a disaster for my ETF? Don't the working men need machines and capital to work?

> If you have $20M and your lifestyle requires no more than $800K/yr of income taxed a waaaaay lower rates than the working stiffs pay on the same, then a 4% return more than suffices to live off of income that is waaaaay more passive than most passive income frauds even come close to promising.

Assuming you are in eg the US than a 4% nominal return is actually taxed quite severely in real terms, ie after you adjust for inflation.

That's because capital gains taxes and taxes on interest don't account for inflation.

My comment is very specific about the ultra rich who use tax sheltering to reduce taxable burden on passive income from bonds: In the US, there is (was?) a special class of municipal (state/local) bonds call "triple tax-free"/TTF, where the owner can receive interest, but pay no federal, state, or local taxes. Of course, there are limits, but it is a big business, and the buyers are almost always ultra rich. To be clear, under the Alternative Minimum Tax (AMT) rules in the US, I doubt you can pay zero taxes, but you can certainly greatly reduce your taxable burden using TTF muni bonds.

Ref: https://www.investopedia.com/terms/t/tripletaxfree.asp

Well, you can also use the buy-borrow-die strategy in the US to avoid capital gains taxes.

Here in my adopted home of Singapore we don't have such silly things as capital gains taxes. Makes things a lot simpler for the average person who doesn't want to pay for the lawyers and accountants.

The average person doesn't pay capital gains tax - at least in the UK; there is a 12 3000 GBP allowance per year of gains which means that you need to have significant assets (think top 10% of the country) before it becomes an issue.

Not £12300 any more, £6000 last year and currently £3000.

Investing is passive income, but most passive income isn't investing.

* A way to generate passive income, for example, are royalties on a book you wrote.

* Semi-passive income might be $50k speaking gigs after e.g. being the PotUS.

In a financed world, perhaps I can make a financial instrument out of future royalties, but for most people, it's not the same.

>If you have $20M and your lifestyle requires no more than $800K/yr of income taxed a waaaaay lower rates than the working stiffs pay on the same,

Won't somebody think of the "working stiffs" who have to slave away for their $800k/yr!?

> Bonds have (relatively) low returns but almost 0 risk

Each of the asset classes you listed has risks. Bonds are subject to term (i.e. inflation) and credit (i.e. default) risk.

Bonds may be less volatile than equities and commodities, but they can definitely go down (e.g. 2022).

The only free lunch in investing is diversification.

Some bonds go down and others have floors.

Sure, there’s no free lunch, but there is the beat-you-up-and-take-your-lunch-money of not investing.

Bonds may have gone down, but they still paid out. Unless people sold at a loss for liquidity or could’ve timed the market and bought low, they were better off than people stashing money in a mattress or most bank accounts.

Yes, holding cash also has risks.

That's not really my point. I think one thing that gets lost in the "everything has different levels of risk" discussion is that many risk/reward profiles are bad. Calling everything a tradeoff is misleading. Banks are more than happy to capitalize on laziness and lack of knowledge (an American is more likely to change their spouse than their bank), so the balance between risk and reward gets thrown out of whack.

The simple term for this is Sharpe Ratio https://en.wikipedia.org/wiki/Sharpe_ratio

If you want to get really deep into investment theory, Beta implies basically everything is a good investment in small enough amounts https://en.wikipedia.org/wiki/Beta_(finance)

Though in practice, Beta is mostly irrelevant beyond a relatively simple portfolio https://finance.yahoo.com/news/warren-buffett-myth-more-why-...

> I think one thing that gets lost in the "everything has different levels of risk" discussion is that many risk/reward profiles are bad.

Yes, not everything is on the efficiency frontier for risk/reward. Eg cash is convenient to spend, so it can 'get away with' offering a worse risk/reward profile.

Yes, the Sharpe ratio is one of many ways to measure risk adjusted returns.

> If you want to get really deep into investment theory, Beta implies basically everything is a good investment in small enough amounts https://en.wikipedia.org/wiki/Beta_(finance)

Well, that assumes no fees, transaction costs and taxes, I think. And even without transaction costs etc, the theoretically optimal amount can be so low that it's not worth bothering with.

If everyone does it, the world grinds to a halt and everyone dies.

Well, everyone can’t do it because not everyone has access to capital

What really happens: if everyone tries to acquire a particular income producing asset, the asset gets so expensive that the return is not worth the risk plus the time value of the money it could generate. Stocks in the 1920's, Tokyo real estate in the 1990s, US housing the mid 2000's...

There was a US housing bust in the late 2000s, but there was never a bubble in the mid 2000s. Contrary to popular opinion.

Otherwise I agree that in principle and in general all else being equal increasing prices lead to lower returns.

This is also true of being a doctor, practicing law, growing fruit, programming computers, driving a cab, creating art, making music, running a car wash, and crab fishing.

It doesn't.

Passive income usually requires a burst of highly-productive time at the beginning.

If you invent a machine which does farming with no human labor, and I invent a factory which makes your machines with no human labor, and so on down the line:

1) Human productivity jumps to infinity

2) No one needs to work

3) We all collect passive income, growing exponentially*

Most passive income is some subset of that. If you write a book read by millions, or invent something saving lives, that's continuing to generate real value for the world. Even if you work very, very hard, while scrimping and saving, so you don't have to work later, everything works out okay (so long as there are kids willing to work hard).

* With different exponents, until we have a class of ultrarich and ultrapoor, until the revolution, with either the poor masses being killed by high tech, or the rich by the human masses

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