I bet some of you are tired of hearing about passive income by now. Why? Sadly, many have either been disappointed or discouraged enough to stop believing in it. No matter how many experts or bloggers tell you that with as little as $5000, you can start off a dividend portfolio, it doesn’t matter. My M35 partner and I are working on a project about passive income that will be unveiled in the coming months and I think it’s important to make sure that living off of passive income does not become some “impossible goal”. It’s far from it.

I’m always surprised when I hear about some people’s long term financial goals. Why? First off, the biggest problem is that most do not have concrete long term goals. The most basic concept is that without concrete plans, no matter what the field, results are dramatically inferior. There are all kind of stats out there and I could point to any number of them but they all come up to the same thing; goals that are not clearly defined will never be obtained. For some reason, many of us always postpone setting goals, especially long term financial ones. Why?

“I have no idea how much I will need/want”
“How would I know if it’s even possible?”
Etc

Of course it’s a challenge but you are not setting some permanent goal that will define the rest of your life here. You are defining goals that can be adjusted as often and as much as you desire. Without a goal however, what will you be adjusting for?

Once the goal is set, the next step is to create a MAP (massive action plan). How much do you need to save up? How must it be reinvested? Is it possible? Or do the goals need to be revisited? Some try to improve their chances by taking more risks with their portfolio but as we discussed, that is not the way to go. I’ll tell you right now.. If like most Americans you are saving less than 5% of your income every year, making your goals come true will be quite a challenge. You need to set a quality lifestlyle at a reasonable cost and as your income improves, your lifestlye should improve by half or so of that amount.

The problem is often that when employees get a $10,000 raise, they increase their expenses by that amount and often even more. That’s a vicious cycle that makes saving a big challenge.

After the goal and objectives are set

Once the two main steps are done, it’s all about deciding what type of passive income you are looking for (dividend? Etf? Etc) and starting to invest your assets in a smart and consistent way. Every week we discuss dividend investing and that is certainly one way to do so. Having a more aggressive approach for “surplus” savings can also be a winning formula as can many other things.

Picture Your Pasive Income Lifestyle

If you could make enough money to enjoy life, make as much money if you were working, travelling around Europe or just spending time at the beach, how would such a life be? When would you retire? It’s easy to forget how this lifestyle is possible to almost anyone…. Personally, living off of passive income is very much a reality and only time stands between myself and this life goal if I can stick to the plan. How about you?

Watching the world currency in these current market conditions is like watching a race to find out who the slowest person is going to be. Countries around the world are all dealing with the same problems and listening to some of the commentary and market news the best investment opportunity is to find the country that can holdout the longest before being overwhelmed by its debt.

Where to hold your assets?

Unfortunately I don’t like any of the major currencies at the moment and believe that it is going to be some of the secondary currencies like the Canadian Dollar, Australian Dollar. Let’s just take a look at the U.S. dollar, which was once considered the reserve currency of the world is now wobbling on its pedestal and if the spending habits of the government don’t change it could fall fairly quickly.

Anywhere but in the US?

The reality is that more and more international investors are losing faith in the U.S. dollar. Looking at a long-term chart we can see that the U.S. dollar index has been in a sharp decline since early 2002. Although the financial crisis provided some short-term momentum in 2008 and 2009, it has continued it is downward trend since June 2010.

On April 27 the U.S. dollar index hit its lowest point since 2008 and is hanging around 73.34. The index has dropped about 17% within the last year. In June of 2010 it rallied to a high of 88.70.

From a technical perspective, the long-term chart does not support higher prices. There appears to be a strong double top forming around the 90.00 area, which is providing some resistance. A break below around 70.00 would mean a continuation of its long-term downward trend.

Unfortunately the fundamental outlook does not look any rosier. The government is trying to spend their way out of this recession (oh wait apparently that ended in 2010 but don’t tell anyone who is still looking for employment) and all they are doing is adding to the bill that they will eventually have to pay off later. On April 27 Fed Chairman Ben Bernanke said that the second round of quantitative easing will end as planned in June but that only address one problem. Currently the national debt is well over $14 trillion and climbing and unfortunately nobody has any new ideas on how to resolve this. We even did discuss the idea of shorting the US government.

We can already start to see the cracks forming in the once solid foundation. A few weeks ago Standard and Poor’s released a confusing outlook on the country’s sovereign debt. Although the country is holding on to its AAA rating but the global rating agency lowered its outlook to “negative” from “stable.”

The reality is that the economy remains under pressure and this will continue to impact the U.S. dollar. The unemployment picture is starting to improve but the unemployment rate is still high and consumers are still extremely timid. The reality is, if U.S. consumers are not spending their hard earned money, the global economy and the U.S. economy will not improve.

It could be worse

As I said at the beginning of this article, the U.S. isn’t even in the worst shape. The European Union is dealing with some major debt problems in several countries, which include: Ireland, Spain, Portugal and Greece; however this is all old news so nobody is paying much attention to them now.

Japan is also in pretty bad shape. In March Standard and Poor’s lowered the sovereign debt rating to AA- (minus) and just released a report, which downgraded the country’s debt outlook to “negative” from “stable.” The country continues to pile on the debt as they try to rebuild their country.

The only positive news about the U.S. is that it is too big to fail. According to the U.S. Treasury Department in February China held about $1 trillion in U.S. debt. Japan is in second place and holds about $890 billion and the United Kingdom owes about $290 billion in government bonds. If the U.S. dollar falls too low these investments will be basically worthless.

But as I said in the beginning of this article none of the major currencies look great. The U.S. dollar might start to rebound but to use my favorite expression; trying to time the bottom is like trying to catch a falling knife. With a little bit of patience you can find better investment opportunities.

So what can we do?

Personally, what I take from all of this is the importance to be diversified. It’s difficult to predict how assets and economies will do in the near future. Greece, Ireland and other European countries could take European assets on quite a ride and it’s always possible that your own country could be next. With all of these sovereign credit issues, I think it’s critical to have a strong diversified portfolio. For a passive income portfolio, that means adding international names. They can still be listed on US markets but would be international companies that have a correlation with international currencies. In the case of a passive ETF portfolio, this is just a reminder of how important it is to include international ETF’s. In terms of rewards vs risks, adding international exposure is a no-brainer…

The past few weeks has seen incredible action in commodity prices. Oil and Gold have suffered greatly but nothing was even close to the collapse in Silver prices. It’s a challenge to draw any conclusions from such dramatic movements. For months, these metals had been gaining steam because of both retail and institutional buying. Then last week, news came out that some of them had started closing their long positions on silver. It’s not clear if they knew something or if they’re selling created even more selling but that pretty much marked the start of a spectacular decline. Just take a look at the charts and you will get an idea. Part of the cause was also the exchanges themselves. Seeing what they considered “excessive” speculation, the CME raised its margin requirements on silver contracts making life more difficult and more expensive for silver traders.

Investing In Commodities

Seeing commodities become so volatile certainly raises some questions. Should you have commodities or commodity exposure in your passive income retirement portfolio? I would personally say that yes you do. Commodities are already an important portion of the world economy and with Chinese and other Emerging markets demand, that is bound to continue its increase. Thus, in the long term, it certainly seems like a no-brainer to own them. Commodities are also uncorrelated to most of the markets and so they have a valuable contribution to your portfolio in terms of risk/reward. That being said, I think events like what happened last wek give a good example of why you do not want to have commodities as the main part of your portfolio. I do believe that over the long term commodities will increase significantly. However, fundamentals are kind of lost in a sea of traders when it comes to commodities making life much more stressful and difficult for those with a long term view.

Should Speculators Trade Commodities?

It’s a fair question isn’t it? Since commodities started trading because farmers wanted to hedge their crops, times have hcnaged quite a bit. Now, actual buyer and sellers are involved in high stakes poker games where it becomes very difficult to predict where it’s not clear what is taking prices up and down. There are underlying more serious issues. Honestly, how could you possibly try to determine who is “hedging” and who isn’t it? Millions of companies have some kind of exposure to silver making it virtually impossible to determine what is hedging from what isn’t. For gold, that would be unthinkable as many use gold as an inflation hedge. There’s just no way it could work.

When It Extends To Food

Paying more for energy or metals is unfortunate for most but speculators trading commodities truly starts to get attention when it affects food prices. Billions of people around the world depend to some extent on food prices and having these prices fluctuating by 10-20% or even more can make life very unpredictable for the billions that do not have enugh to tolerate such movements.

How To Get Some Commodity Exposure?

There are many different ways but by far the cheapest and most efficient solution involves ETF’s. We have discussed the top ones many times but I think you want to focus on two types of ETF’s:

–Commodity ETF’s that hold physical commodities (such as GLD)
–Futures based (focus on ETF’s that do not roll monthly but rather infrequently.. They will suffer less erosion)

Facebook has been the hottest property in tech for a while now. Sure, I’ve been able to participate in trades on Apple (AAPL), Microsoft (MSFT) and other big and hot names. But that is not where the real action is going on. If you did see the movie “Social Network”, you will remember the sentence spoken by Justin Timberlake (playing Sean Parker):

“A million dollars isn’t cool. You know what’s cool? A billion dollars”

The fact is that he seems to have been right about Facebook, its potential and how important the social network has been for the internet in general. I have been talking about Facebook for some time now, have described what I would do if I were Mark Zuckerberg for a year and have been raving about the greatest opportunity of our investing lifetime, being a Facebook shareholder. The problem of course lies in the fact that Facebook is not a public company meaning only venture capitals that invested seed money can profit from the incredible growth right? Not exactly

Feels like everyone else is invited to the party

Thanks to secondary markets, it’s been much easier for high net worth individuals to get involved and when Goldman Sachs bought a stake both for itself and its clients, I took it personal. Honestly, I love the process of these secondary markets as they make it much easier for these smaller companies to keep their employees happy, provide more accurate valuations and more transparency. That being said, sometimes it feels like everyone who truly wants to get in on Facebook stock has already done so.

I want to buy Facebook stock

Some have said that at this point, Facebook’s valuation has become a bubble, that having a company like this trading at $60-70B is insane. That is crazy. No matter if there will be a 2.0 dot com crash, I still think Facebook is a bargain. According to a recent Wall Street Journal article, Facebook is  on pace to earn over $2 billion in earnings before tax this year. How fast are things improving? Revenues this year are expected to come in at over $4 billion, more than double last year’s $1.86 number, that is growth of over 100% for both revenues and profits with no slowing down in the horizon.

So just how much is it worth?

If companies like Amazon (AMZN) and Baidu (BIDU) are currently trading at P/E ratios between 40 and 50, I think it’s fair to say that Facebook should trade at a significantly higher ratio. How much? I would imagine between 75 and 100 at its current growth which would put the company somewhere between $150-200B. That is significantly higher than where it’s currently trading and I would thus put Facebook as a strong buy. It is growing fast now but could enter into so many new different activities to keep or even increase its top and bottom line growth.

My Big problem

Of course, my big problem lies in the fact that buying shares that are 50% undervalued is not possible for me right now. I truly hope that Zuckerberg will take his company public soon (even though I probably would not if i were him) because eventually all investors will see the same thing that i see, a great company trading at a big discount….

Disclosure: Unfortunately, none to declare:)