Marc Andreesen, the famed venture capitalist, coined a phrase several years ago: "Software is eating the world."
In 2020, software's appetite seems to have picked up.
The pandemic has sped up already extant tech trends, accelerating the adoption of some technologies by years in a matter of months. On top of that, technology stocks have been incredibly resilient in one of the worst economic environments the United States has ever seen.
Through the close of trading on May 19, the Dow Jones Industrial Average had taken a 15.2% year-to-date hit. The S&P 500 Index, considered an even better metric of how large U.S. corporations are faring, was off 9.5%.
The tech-heavy Nasdaq, for its part, in a year in which more than 36 million people filed for unemployment in just two months, was actually up 2.4%.
Here's a quick look at how and why the pandemic has benefited the tech sector in 2020 – and, on the investing side, whether a longer-term, secular shift into tech stocks may be underway.
Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.
“Many people think that passive income is about getting something for nothing,” Tresidder says. “It has a ‘get-rich-quick’ appeal … but in the end, it still involves work. You just give the work upfront.”
In practice, you may do some or all of the work upfront, but passive income often involves some additional labor along the way, too. You may have to keep your product updated or your rental property well-maintained, in order to keep the passive dollars flowing.
What is passive income?
11 passive income ideas for building wealth
Perhaps the most striking quote out of Silicon Valley about the impact the virus has had on business came from Microsoft (MSFT) CEO Satya Nadella, whose 11-word commentary on recent quarterly results says it all:
"We've seen two years' worth of digital transformation in two months," Nadella wrote in the earnings report.
The clear catalysts of stay-at-home orders, forced business closures and quarantining have intuitively boosted demand for workplace collaboration software, communication services, online learning tools, telehealth, e-commerce platforms and delivery offerings, to name a few.
The highly visible stock market winners forced changes to workflow and consumer behavior and include video-conferencing stock Zoom (ZM), e-commerce giant Amazon.com (AMZN), online learning solutions platform Chegg (CHGG) and telehealth company Teledoc (TDOC), among many others.
It looks like 2020 will be a defining moment for many younger innovative tech-centric companies – and it's not the first time that a virus has jump-started demand for certain services in what would be a defining way.
"Each major downturn – in this case, a pandemic – triggers a business model change in the impacted regions," says Chao Cheng-Shorland, CEO and co-founder of ShelterZoom as well as DocuWalk, a blockchain-based virtual negotiating platform for facilitating contracts, documents and transactions securely.
"2003's SARS outbreak accelerated the growth of companies like Alibaba. Without SARS, the maturity curve for online shopping in China would have taken much longer," Cheng-Shorland says.
Today, Alibaba (BABA) is one of the biggest companies in the world, worth about $600 billion.
While much of the onboarding to large addressable markets like e-commerce has happened already, other opportunities for digital services are still in the nascent stages of longer-term growth.
Matt Burns is the startup ecosystem leader at monday.com, a software-as-a-service workplace collaboration platform, with a valuation of around $2 billion. Among its 100,000 paying teams are Fortune 500 firms like Adobe (ADBE), General Electric (GE) and Walmart (WMT).
"Remote work won't be a niche anymore, it's already the mainstream," Burns says. "With large tech companies like Twitter already adopting it, those who can work from home will likely extend the offer to their employees as a way of showing they are future-minded."
Tech acceleration
If you’re thinking about creating a passive income stream, check out these 11 strategies and learn what it takes to be successful with them, while also understanding the risks associated with each idea.
1. Selling information products
One popular strategy for passive income is establishing an information product, such as an e-book, or an audio or video course, then kicking back while cash rolls in from the sale of your product. Courses can be distributed and sold through sites such as Udemy, SkillShare and Coursera.
Opportunity: Information products can deliver an excellent income stream, because you make money easily after the initial outlay of time.
Risk: “It takes a massive amount of effort to create the product,” Tresidder says. “And to make good money from it, it has to be great. There’s no room for trash out there.”
Tresidder says you must build a strong platform, market your products and plan for more products if you want to be successful.
“One product is not a business unless you get really lucky,” Tresidder says. “The best way to sell an existing product is to create more excellent products.”
Once you master the business model, you can generate a good income stream, he says.
Investing in rental properties is an effective way to earn passive income. But it often requires more work than people expect.
If you don’t take the time to learn how to make it a profitable venture, you could lose your investment and then some, says John H. Graves, an Accredited Investment Fiduciary (AIF) in the Los Angeles area and author of “The 7% Solution: You Can Afford a Comfortable Retirement.”
Opportunity: To earn passive income from rental properties, Graves says you must determine three things:
How much return you want on the investment
The property’s total costs and expenses
The financial risks of owning the property
For example, if your goal is to earn $10,000 a year in rental income and the property has a monthly mortgage of $2,000 and costs another $300 a month for taxes and other expenses, you’d have to charge $3,133 in monthly rent to reach your goal.
Risk: There are a few questions to consider: Is there a market for your property? What if you get a tenant who pays late or damages the property? What if you’re unable to rent out your property? Any of these factors could put a big dent in your passive income.
2. Rental income
With affiliate marketing, website owners, social media “influencers” or bloggers promote a third party’s product by including a link to the product on their site or social media account. Amazon might be the most well-known affiliate partner, but eBay, Awin and ShareASale are among the larger names, too.
Opportunity: When a visitor clicks on the link and makes a purchase from the third-party affiliate, the site owner earns a commission.
Affiliate marketing is considered passive because, in theory, you can earn money just by adding a link to your site or social media account. In reality, you won’t earn anything if you can’t attract readers to your site to click on the link and buy something.
Risk: If you’re just starting out, you’ll have to take time to create content and build traffic.
3. Affiliate marketing
Investing in a high-yield certificate of deposit (CD) at an online bank can allow you to generate a passive income and also get one of the highest interest rates in the country. You won’t even have to leave your house to make money.
Opportunity: To make the most of your CD, you’ll want to do a quick search of the nation’s top CD rates. It’s usually much more advantageous to go with an online bank rather than your local bank, because you’ll be able to select the top rate available in the country. And you’ll still enjoy a guaranteed return of principal up to $250,000, if your financial institution is backed by the FDIC.
Risk: As long as your bank is backed by the FDIC, your principal is safe. So investing in a CD is about as safe a return as you can find. Over time, the biggest risk with fixed income investments such as CDs is rising inflation, but that doesn’t appear to be a problem in the near future.
4. Invest in a high-yield CD
A peer-to-peer (P2P) loan is a personal loan made between you and a borrower, facilitated through a third-party intermediary such as Prosper or LendingClub.
Opportunity: As a lender, you earn income via interest payments made on the loans. But because the loan is unsecured, you face the risk of default.
To cut that risk, you need to do two things:
1. Diversify your lending portfolio by investing smaller amounts over multiple loans. At Prosper.com, the minimum investment per loan is $25.
2. Analyze historical data on the prospective borrowers to make informed picks.
Risk: It takes time to master the metrics of P2P lending, so it’s not entirely passive. Because you’re investing in multiple loans, you must pay close attention to payments received. Whatever you make in interest should be reinvested if you want to build income. Economic recessions can also make high-yielding personal loans a more likely candidate for default, too.
5. Peer-to-peer lending
Shareholders in companies with dividend-yielding stocks receive a payment at regular intervals from the company. Companies pay cash dividends on a quarterly basis out of their profits, and all you need to do is own the stock.
Dividends are paid per share of stock,
so the more shares you own, the higher your payout.
Opportunity: Since the income from the stocks isn’t related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money.
Risk: The tricky part is choosing the right stocks. Graves warns that too many novices jump into the market without thoroughly investigating the company issuing the stock. “You’ve got to investigate each company’s website and be comfortable with their financial statements,” Graves says. “You should spend two to three weeks investigating each company.”
That said, there are ways to invest in dividend-yielding stocks without spending a huge amount of time evaluating companies. Graves advises going with exchange-traded funds, or ETFs. ETFs are investment funds that hold assets such as stocks, commodities and bonds, but they trade like stocks.
“ETFs are an ideal choice for novices because they are easy to understand, highly liquid, inexpensive and have far better potential returns because of far lower costs than mutual funds,” Graves says.
Another key risk is that stocks or ETFs can move down significantly in short periods of time, especially during times of uncertainty, as in early 2020 when the coronavirus crisis shocked financial markets. Economic stress can also cause some companies to cut their dividends entirely, while diversified funds may feel less of a pinch.
6. Dividend stocks
It doesn’t get any more passive than putting your money in a savings account at the bank or one of the many online banks offering high yields. Then sit back and watch the interest mount up.
Opportunity: Your best bet here is going with an online bank, since they typically offer the highest rates and you can usually easily transfer your money between your primary bank and the online bank. Online rates can often be 10 times higher or more than what your local bank may offer.
Risk: If you invest in an account insured by the FDIC, you have almost no risk at all up to a $250,000 threshold per account type per bank. The biggest risk is probably that interest rates tend to fall when the economy weakens, and in this case, you would have to endure lower payouts that potentially don’t earn enough to beat inflation. That means you’ll lose purchasing power over time.
7. Savings accounts
A REIT is a real estate investment trust, which is a fancy name for a company that owns and manages real estate. REITs have a special legal structure so that they pay little or no corporate income tax if they pass along most of their income to shareholders.
Opportunity: You can purchase REITs on the stock market just like any other company or dividend stock. You’ll earn whatever the REIT pays out as a dividend, and the best REITs have a record of increasing their dividend on an annual basis, so you could have a growing stream of dividends over time.
Like dividend stocks, individual REITs can be more risky than owning an ETF consisting of dozens of REIT stocks. A fund provides immediate diversification and is usually a lot safer than buying individual stocks — and you’ll still get a nice payout.
Risk: Just like dividend stocks, you’ll have to be able to pick the good REITs, and that means you’ll need to analyze each of the businesses that you might buy — a time-consuming process. And while it’s a passive activity, you can lose a lot of money if you don’t know what you’re doing.
REIT dividends are not protected from tough economic times, either. If the REIT doesn’t generate enough income, it will likely have to cut its dividend or eliminate it entirely. So your passive income may get hit just when you want it most.
8. REITs
A bond ladder is a series of bonds that mature at different times over a period of years. The staggered maturities allow you to decrease reinvestment risk, which is the risk of tying up your money when bonds offer too-low interest payments.
Opportunity: A bond ladder is a classic passive investment that has appealed to retirees and near-retirees for decades. You can sit back and collect your interest payments, and when the bond matures, you “extend the ladder,” rolling that principal into a new set of bonds. For example, you might start with bonds of one year, three years, five years and seven years.
In a year, when the first bond matures, you have bonds remaining of two years, four years and six years. You can use the proceeds from the recently matured bond to buy another one year or roll out to a longer duration, for example, an eight-year bond.
Risk: A bond ladder eliminates one of the major risks of buying bonds – the risk that when your bond matures you have to buy a new bond when interest rates might not be favorable.
Bonds come with other risks, too. While Treasury bonds are backed by the federal government, corporate bonds are not, so you could lose your principal. And you’ll want to own many bonds to diversify your risk and eliminate the risk of any single bond hurting your overall portfolio.
Because of these concerns, many investors turn to bond ETFs, which provide a diversified fund of bonds that you can set up into a ladder, eliminating the risk of a single bond hurting your returns.
9. A bond ladder
This straightforward strategy takes advantage of space that you’re probably not using anyway and turns it into a money-making opportunity.
Opportunity: You can list your space
on any number of websites, such as Airbnb,
and set the rental terms yourself. You’ll collect a check for your efforts with minimal extra work, especially if you’re renting to a longer-term tenant.
Risk: You don’t have a lot of financial downside here, though letting strangers stay in your house is a risk that’s atypical of most passive investments. Tenants may deface or even destroy your property or even steal valuables, for example.
10. Rent out a room in your house
You may be able to earn some extra money by simply driving your car around town. Contact a specialized advertising agency, which will evaluate your driving habits, including where you drive and how many miles. If you’re a match with one of their advertisers, the agency will “wrap” your car with the ads at no cost to you. Agencies are looking for newer cars, and drivers should have a clean driving record.
Opportunity: While you do have to get out and drive, if you’re already putting in the mileage anyway, then this is a great way to earn hundreds per month with little or no extra cost. Drivers can be paid by the mile.
Risk: If this idea looks interesting, be extra careful to find a legitimate operation to partner with. Many fraudsters set up scams in this space to try and bilk you out of thousands.
11. Advertise on your car
How many streams of income should you have?
There is no “one size fits all” advice when it comes to generating income streams. How many sources of income you have should depend upon where you are financially, and what your financial goals for the future are. But having at least a few is a good start.
“You’ll catch more fish with multiple lines in the water,” says Greg McBride, CFA, chief financial analyst at Bankrate. “In addition to the earned income generated from your human capital, rental properties, income-producing securities and business ventures are a great way to diversify your income stream.”
Even amid widespread shutdowns and millions losing their jobs, the tech-heavy Nasdaq was up 2.4% through the close of trading on May 19.
PHOTO: GETTY IMAGES
These trends are all fascinating. Case studies in rapid tech adoption, business model pivots and both supply and demand shocks are playing out in real time. For investors, the question is how long these trends will last – and how to reposition their portfolios for the brave new world.
Jonathan Curtis, portfolio manager at Franklin Templeton Investments, thinks that for many of these shifts in services and consumer behavior, the genie will be tough to put back in the bottle. He cites a litany of examples: the work-from-home environment, remote education, telehealth and contact-less delivery – these trends have legs.
"We think a lot of these tools that we've had to build will remain pretty relevant … some of these experiences are better," Curtis says.
On top of that, tech stocks at large are still reasonably priced, Curtis says.
"When you look at tech relative to other sectors, it has some of the best growth over the last three years and we think it's going to be relatively resilient through this crisis – and that there's a potential for acceleration," Curtis says.
"Relative to the S&P 500 (.SPX), tech is trading at only a modest premium – a 5% to 7% premium on a price-to-earnings basis – but you get really good growth and really good quality, so we don't think you're paying a big premium," Curtis says.
He cites tech's high EBITDA, or earnings before interest, taxes, depreciation and amortization, margins – a popular profitability metric – and great balance sheets that enable companies to heavily reinvest in their businesses or return capital to shareholders when other sectors can't.
To be fair, Curtis says it's not only Silicon Valley companies that are benefiting from the changes forced upon society in 2020. "Who's done well?" he says. "Obviously, the big tech companies but also the companies that have invested in tech." He mentions companies like Target (TGT), Walmart and Nike (NKE) – all businesses whose previous investments in technology have allowed them to serve customers in safe, convenient ways during the pandemic.
2020s secular shift into tech stocks
As far as the outlook for tech stocks in the medium- and long-term, it's tempting to think that investors are overreacting to tech's resilience in 2020 and that outperformance can't keep up.
But in the shorter term, industries like travel, leisure and events have shown their fragility. Department stores are disappearing, commercial real estate is in trouble, and the volatility of the energy sector as a whole has been on full display this year. Meanwhile, fixed-income yields today would be considered a joke in normal markets.
Where can investors in these fragile, unattractive or high-risk areas turn to? Tech, which has proven exactly how robust it is under the most extreme circumstances – and enjoys those high margins and attractive balance sheets – looks like a nice option.
Plus, Curtis sees one more long-term tailwind for tech stocks that should drive demand even when things start getting back to normal.
"We're going to see an acceleration by the digital laggards in investing in tech and that'll continue to drive fundamental outperformance," Curtis says. The "adapt or die" mentality required in the natural world is also required in the world of commerce and free markets.
Andreessen once wrote: "We are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy."
Where are we now? News recently broke that the U.S. Department of Justice and multiple state attorneys general are reportedly moving to bring antitrust suits against Alphabet's (GOOG) Google, with other names likely to follow. Rumors that Amazon was in talks to buy movie theater chain AMC Entertainment (AMC) also surfaced in recent weeks and were credible enough to send shares 30% higher.
It's no longer a theory: in 2020, Andreessen's technological and economic shift is happening. It's one event that everyone can see, live.
What can stop this train?