Passive income seems like the dream for many: earning money without working, a steady cash flow that requires no effort. But is it really that simple? Or are there hidden risks and compromises behind this enticing idea that often go unnoticed?

In this video, we’ll dive into the world of passive income, exploring what it truly means and uncovering the traps hidden behind this appealing promise. Not everything that glitters is gold, especially in the world of finance.

Here’s what you’ll find in the video:
•A clear explanation of what passive income is (and what it isn’t)
•Practical examples: systematic trading, options selling, investing
•The truth about the risks, illusions, and challenges of the financial world

Don’t be fooled by promises of easy money. Passive income means embracing risk, facing losses, and always thinking long-term.

Are you ready to discover the whole truth about passive income?

Transcription

Passive Income: What Does It Really Mean?

Hello everyone, and welcome to this new video. Today, we are going to talk about passive income. Passive income has become a trending topic, often associated with some form of financial activity, whether speculative or not.

The Dream of Passive Income: Easy Earnings or Illusions?

But can you really live on passive income, or is it just a myth? Let's explore this question together in this video. First, let's clear up what we mean by passive income.

Passive income refers to a stream of money that comes in without requiring you to actively work for it. In other words, it detaches the concept of time from pay.

Instead of working to earn money, passive income implies that if you don't work, money still flows in. This is easy to imagine when associated with a financial activity like systematic trading, for example.

Here, you create a rule, a logic, apply it to the market, and let it work autonomously for you. There is no need to constantly monitor the charts to decide whether to buy or sell.

Another example could be selling options. Selling options may generate income simply from the passage of time, or you may consider even investing, buying stocks or ETFs and holding on to them for 20, 30, or even more years because you believe in societal progress, innovation, and growth.

But be careful. Passive income is often an illusion. Why do I say that? Because people frequently identify passive income with a paycheck that arrives at the end of the month without needing to go to work or do anything at all.

They picture themselves receiving this monthly paycheck that guarantees a peaceful, worry-free life. And that's exactly the concept I want to talk about today.

For this video, I've prepared three examples of potential passive income streams from the financial worlds. Let's take a closer look at them.

Systematic Trading: Is It Truly Passive?

The first example is systematic trading. Imagine building and coding a system that produces an equity curve, a club that reflects the profit of your strategy.

Now, let's focus on the out-of-sample portion of this curve. This system, since being created in June 2022, has generated around $22,000 in profits.

These charts includes all cost commissions, slippage, everything. So is this a passive income? Technically, yes. I worked on the script in June 2022, and since then, the strategy has worked for me, generating a passive income.

But reality is not that simple. Why? Because if we analyze the equity line more closely, we will notice some key details. For instance, during a significant period from mid-2020 to January 2022, this strategy produced virtually nothing in real-time.

If we were to exclude just a few profitable trades from this graph, the results would look even worse. I set everything up, launched the system, and instead of earning I was losing money.

Of course, this leads to frustration and skepticism about this method. Someone may even label systematic trading is a scam because I traded it for two years and it didn't produce any results. Truth is, it's okay. I'm okay with this equity.

I cannot judge something based on a time horizon equal to the one of a regular salary that arrives every month. Sure, you could argue it's still passive income because it doesn't require constant attention, allowing you to focus on other things while it works for you.

However, it's not realistic to expect the consistency of a paycheck arriving every week or every month. Even though this equity curve may look great in the long term, there is even no guarantee it will continue producing similar results in the future.

Statistical analysis suggests that it's more likely to perform well in the future, but statistics are never certainties. While you can manage risk, uncertainty is by definition unpredictable.

And that monthly paycheck-like stability you might dream from systematic trading, it doesn't exist, and it will never exist.

Options Selling: A Stable Cash Flow or a Hidden Risk?

Let's move on to another example. Here we have the equity curve of selling naked puts on the SP 500 Index. This strategy earns a premium month after month by selling options. It's an attractive approach because it often generates steady income.

However, as you can see during an extreme event like COVID, it can wipe out your entire account. So is it truly passive income if there is always a sword of Damocles hanging over for you, ready to strike with the next market crash?

The peace of mind associated with passive income doesn't exist here because you are constantly worrying about potential market turbulence. The last example is investing.

Investing: Earning Without Working, but at What Cost?

Here is a logarithmic view of the Standard and Poor 500 Index. If we compare this to the concept of a monthly paycheck, it's clear that consistent monthly income is impossible.

For example, between 1996 and 2009, the index produced virtually nothing. Or imagine investing in 2007. In just two years, you would have lost the 50%.

Passive Income: Conclusions and the Reality of the Financial World

This is far from the idea of steady monthly income. Does this mean investing Are trading, systematic trading, or option selling are bad? Absolutely not.

What needs to be criticized is the false expectation that these approaches will generate steady, reliable passive income every month, week, or year.

That simply doesn't exist. If you decide to enter the financial world, you need to accept that risk is part of the game. Risk means you could lose money, sometimes for weeks, months, or even years in a row.

Judging an approach based on a few months of results is short-sighted. The real test of any strategy is its long-term performance. For example, in investing, people often refer to 30-year rolling returns.

In summary, can we talk about passive income passive income in finance? Yes, but only without the illusion of a steady and continuous income over time.

Passive income in finance always involves risk, and with risk comes the potential for losses. You cannot expect to start a passive financial strategy, whether through investing or other methods, and receive a stable, predictable cash flow.

That simply doesn't happen, and anyone who promises otherwise is lying. There are so many other aspects of passive income in finance to discuss.

Share your thoughts in the comments and let me know if you'd like me to dive deeper into any specific topic, including the psychological challenges of dealing with losses.

Goodbye and see you next time.

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