How I’d invest £20,000 in an ISA to earn passive income for life

Here’s my two-part strategy for building a portfolio of stock investments in a Stocks and Shares ISA aimed at achieving lifelong passive income.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The new ISA allowance will be available to us on 6 April. This year it’s been held flat at £20,000. But I see it as an opportunity to build passive income.

Sadly, the allowance doesn’t mean the government is giving us £20k! But it does mean we can invest up to £20k of our own money in an ISA. And we may do so until 5 April 2023. And then the allowance will renew. However, ISA allowances may change in the future. And it’s even possible the government could alter the tax advantages provided.

Aiming for passive income for life

Right now, any gains made within an ISA are tax-free. So I’m keen to put as much as I can into a Stocks and Shares ISA. And although the full annual allowance is £20k, we can invest as much as we like up to that limit during the year.

Once the money is in, we can invest it in shares whenever we choose. For example, we don’t have to invest all the money immediately. However, I see a big opportunity developing in the stock market because of the current correction. So I’m keen to get started and will likely invest some of my new allowance in April.

The primary aim of my programme of investment will be to earn passive income for life. And the income will arrive in the form of shareholder dividends paid by my investee companies. However, I want my investments to grow first so the eventual stream of passive income will be as large as possible. And that means I’m in the building stage of my portfolio.

To begin with, I’ll reinvest all dividends and other gains to ensure the process of compounding is working for me. And my approach to building a portfolio of investments will have two pathways.

A two-part strategy

The first will be aimed at matching the performance of the general stock market. And to do that, I’ll invest in several low-cost tracker investments.

For example, I’ll buy trackers following London’s FTSE 100 and FTSE 250 indices. And I’ll aim to track small-cap shares in the UK as well. On top of that, I’ll track the American stock market and some emerging markets abroad.

The second pathway will be to invest in individual company stocks. And with that approach, I’ll aim to achieve better returns than those produced by tracking the markets. But, of course, there’s no guarantee I’ll succeed in beating the markets. Shares can go down as well as up and all stocks come with risks as well as positive potential.

Nevertheless, I’d embrace the risks and aim to mitigate them by doing thorough research and investing with care. And although diversification is important too many stocks will likely reduce my portfolio’s potential.

So I’d select a handful from my watchlist, which contains defensive names such as British American TobaccoUnilever and Diageo, among others.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco, Diageo, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »