Quit your side hustle! Here are 3 rules to build passive income on the ASX instead

Are you slogging away at job after job in an effort to bolster your income? There might be a better way. I think I could begin to replace my part-time earnings with passive income by investing in ASX dividend shares.

And building passive income on the stock market doesn’t have to be a complicated – or overly risky – endeavour.

Here are three simple risk-reduction rules I would follow if I were aiming to replace my side hustle with dividend income.

3 ASX passive income rules to help you ditch your side hustle

1. Diversify

The first rule I would consider is arguably one of the most touted: diversification.

A diverse portfolio provides incomparable protection against downturns in any single sector, industry, or stock. It also provides better exposure to sectors, industries, or stocks that outperform the rest.

Indeed, research has shown the majority of the ASX’s gains come from just 4% of shares. I believe that a diverse portfolio has a better chance of being on board the market’s few major winners.

Diversifying also means an investor isn’t reliant on any one sector, industry, or stock for their passive income.

2. Consider the market’s cyclicality

I’ve said it before and I’ll say it again: past performance doesn’t indicate future performance. However, the economy (and, as an extension, the market) does operate in cycles.

Thus, my second rule is to consider the economic cycle and the impact it might have on your passive income stream.

Some ASX shares or sectors tend to outperform others when the economy is booming. On the other hand, some typically find better support during a recession. Others are resilient to both.

If an investor is particularly risk averse, they might turn to defensive ASX stocks when building passive income. Another investor with a greater risk tolerance might lean into cyclical shares for the same purpose.

3. Allocate assets strategically  

Finally, I advise passive income investors to consider where all their assets sit at any given time. Cash included.

It might be tempting to tip all your spare coins into an ASX share you feel could provide mountains of passive income.

However, having liquid funds like cash on hand in an emergency (or upon the arrival of an unexpected bill) is paramount.

With interest rates on the rise, it isn’t a bad time to allocate a little more to a ‘just in case’ savings account anyway.

The post Quit your side hustle! Here are 3 rules to build passive income on the ASX instead appeared first on The Motley Fool Australia.

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